TAX BREAK

Like-Kind Exchange Treatment for Both Personal and Business Use Property by Douglas E. McCash (Continued)

 

 

The results of the transaction are as follows:

 

 $470,000   Amount Realized ($460,000 FMV of Townhouse + $10,000 Cash)

-$190,000   Adjusted Basis ($210,000 Basis in House - $20,000 Depreciation)

 $280,000   Realized Gain

 

After computing the gain realized, Janet may then exclude the full amount allowed by § 121, which is $250,000 for an unmarried individual.  Subtracting the gain excluded under § 121, Janet can then utilize § 1031 to defer the remaining $30,000 gain, including the $20,000 gain attributable to depreciation.

 

To compute Janet’s basis in the townhouse, the following formula is used:

 

  $190,000   Basis in relinquished property at time of exchange

+$250,000   Gain excluded under § 121

- $  10,000   Cash received

  $430,000   Basis 

 

Rev. Proc. 2005-14 has additional examples for situations where the property is used simultaneously for both personal and business uses.  In those situations, the Revenue Procedure points out that the amount realized, basis, adjusted basis, and realized gain must be calculated by allocating percentages to personal and business use.  You may review these examples and see the full text of Rev. Proc. 2005-14 at www.irs.gov/irb/2005-07_IRB/ar10. 

 

While the passage of the American Jobs Creation Act has limited a taxpayer’s ability to use §§ 1031 and 121 in subsequent transactions, Rev. Proc. 2005-14 provides examples of situations where both sections may be used as part of a single transaction.  If you have any questions regarding these new guidelines or planning opportunities they may create, we would be happy to discuss them with you.

 

 

 

To all current Tax Break Listings

Please read our Disclaimer first.

The Web Site of Fitzgerald, Schorr, Barmettler & Brennan, P.C., L.L.O., the Omaha law firm with over a century of experience and solutions