Gains, losses, and nontaxable exchanges

Area 3: Federal Taxation of Property Transactions (5-15%)

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Topics

Capital gains and losses (Section 1231)
Depreciation recapture (Sections 1245, 1250)
Like-kind exchanges (Section 1031)

Lessons

Study Frameworks

Property Transactions — Basis Concepts

Basis Determination

Purchased Property

Cost basis = Price + acquisition costs

Gifted Property

Gain basis: Donor's adjusted basis

Loss basis: Lower of donor's basis or FMV at date of gift

Add gift tax paid on appreciation

Inherited Property

Stepped-up basis to FMV at date of death

Alternate valuation: FMV 6 months after death

Holding period always long-term

Like-Kind Exchange (§1031)

Basis of old property

− Boot received + Boot paid

+ Gain recognized

Basis in new property

Capital vs. Ordinary Gain/Loss

Is the asset a capital asset (not inventory, receivables, depreciable business property, or §1231 asset)?

Yes

Was the asset held for more than one year?

Yes

Long-term capital gain/loss (LTCG/LTCL) — preferential rates (0%/15%/20%)

Short-term capital gain/loss (STCG/STCL) — ordinary rates

Is the asset §1231 property (depreciable business property held >1 year)?

Yes

Is the net of all §1231 gains and losses a gain?

Yes

Treat as long-term capital gain (subject to §1245/§1250 depreciation recapture on ordinary portion)

Treat as ordinary loss

Ordinary income/loss

Like-Kind Exchange Qualification (§1031)

Is the property real property (land or buildings)?

Yes

Is the property held for use in a trade/business or for investment (not personal use or inventory)?

Yes

Is the exchange for other real property of like kind?

Yes

Qualifies for §1031 — gain deferred to extent no boot received

Does not qualify — fully taxable exchange

Does not qualify — must be business/investment property

Does not qualify — §1031 applies only to real property (after TCJA 2017)

Involuntary Conversion Deferral (§1033)

Was property destroyed, stolen, seized, or condemned (involuntary conversion)?

Yes

Did the taxpayer receive insurance proceeds or condemnation award exceeding adjusted basis (gain realized)?

Yes

Did the taxpayer reinvest in qualified replacement property within the replacement period?

Yes

Was the full amount reinvested (cost of replacement ≥ amount realized)?

Yes

No gain recognized — full deferral; new basis = cost − deferred gain

Gain recognized = amount realized − cost of replacement (partial deferral)

Full gain recognized — no deferral available

No gain to defer — loss may be deductible (casualty loss rules apply)

§1033 does not apply — consider §1031 or other provisions

Gain on Property Sale

Amount Realized − Adjusted Basis

Amount Realized

Cash + FMV of Property Received + Liabilities Assumed by Buyer − Selling Expenses

Like-Kind Exchange — Boot Gain

Gain Recognized = Lesser of (Gain Realized, Boot Received)

Losses are never recognized in a §1031 exchange

Like-Kind Exchange — New Basis

Basis of Old Property − Boot Received + Boot Paid + Gain Recognized

§1245 Depreciation Recapture

Ordinary Income = Lesser of (Gain Realized, Accumulated Depreciation)

Applies to personal property — all depreciation recaptured as ordinary income

Property Transaction — Characterization

Asset Type	Holding Period	Gain Treatment	Loss Treatment
Capital asset	≤1 year	STCG (ordinary rates)	STCL
Capital asset	>1 year	LTCG (preferential rates)	LTCL
§1231 property	>1 year (net gain)	LTCG	N/A
§1231 property	>1 year (net loss)	N/A	Ordinary loss
§1245 property	Any	Ordinary (up to depr.); excess is §1231	Ordinary loss
Inventory / AR	Any	Ordinary income	Ordinary loss

HIT DISCHolding period >1 year, Investment or business use, Title to real property, Domestic property, In exchange for like-kind, Same taxpayer, Contemporaneous identification (45 days)

Requirements for §1031 like-kind exchange qualification.

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