Concepts and Mechanics of Exchanges - 16 CPE Credit Hours
While tax reform visions have changed the tax on profits realized from the disposition of real estate, investors still seek escape hatches from the capital gain tax. Tax-deferred exchanges permit the disposition of property often with the taxpayer receiving significant cash but without the payment of any tax. Functionally, an exchange is a bridge over the normally taxable event of moving from one property to another. This course alerts the practitioner to the different planning opportunities that surround exchanging. Participants will be able to identify, analyze, and handle effectively the complex tax problems that arise under 1031. This understanding will be directly applied to the structuring and audit survival of multi-party and delayed exchanges.
Completion Deadline & Exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provided.
Course Level: Overview. This program is appropriate for professionals at all organizational levels.
Field of Study: Taxes
Prerequisite: General understanding of federal income taxation.
Advanced Preparation: None
Learning Assignments & Objectives
As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.
Chapter 1 Introduction - §1031
At the start of Chapter 1, participants should identify the following topics for study:
* ERTA & TEFRA
* Tax Reform Act of 1986
* Reform Act of 1997, Budget Act of 1998 & 2003 Bush Tax Act
* Tax Reform of 1986 & Revenue Act of 1987
* Disposition of Installment Note
* Stepped-Up Basis on Death
* Related Parties
* Security Issues
* Exchange Benefits
After reading Chapter 1, participants will be able to:
1. Identify two basic factors that determine the popularity of exchanging, list tax law changes influencing exchange popularity providing reasons for implementing an exchange in light of current capital gains rates, name the capital gain rate "baskets" and state the tax treatment of assets in each category.
2. Show the differences between exchanges and installment sales noting cost benefits, name several advantages given to exchanging by recent legislation and list four continuing problems that can arise with an installment sale that can act as an impetus for using an exchange.
3. State seven tax benefits of exchanges showing the advantages they create over installment sales and list nine issues that can be resolved or facilitated by using a like-kind exchange.
After studying the materials in Chapter 1, answer the exam questions 1 to 8.
Chapter 2 Section 1031 & Its Function
At the start of Chapter 2, participants should identify the following topics for study:
* Code language
* Section 1031 as an exception to the general rule of taxation
* Concept of tax deferral
* Continuity of investment
* Administrative convenience
* IRS position
* Mandatory application
After reading Chapter 2, participants will be able to:
1. Define the conceptual changes made to §1031 by the TRA ’84, TRA ’86, the Revenue Act of 1987, and the RRA ’90 and outline the current provisions of §1031 by:
a. Showing the differences in §1031 from the general rule of taxation under §1001;
b. Stating its legislative evolution; and
c. Recognizing the original Congressional rationale of §1031 contained in the concepts of continuity of investment and administrative convenience.
2. Listing instances where the IRS may assert an unintended mandatory application of §1031.
After studying the materials in Chapter 2, answer the exam questions 9 to 13.
Chapter 3 Statutory Requirements & Definitions
At the start of Chapter 3, participants should identify the following topics for study:
* Qualified transaction – exchange v. sales
* Held for productive use or investment
* Change in property’s character
* State of mind concept
* Same taxpayer requirement
* Statutory exclusions from §1031
* Like kind property
* Like-kind requirement for personal property
* Multiple asset exchanges
* Real v. personal property
After reading Chapter 3, participants will be able to:
1. Name the three elements §1031 stating how these elements conceptually define a like-kind exchange and differentiate such a transaction from a sale.
2. List five excluded property types and showing their contrast with qualified property types by defining the phrases “held for productive use in a trade or business,” “productive use,” and “investment purpose” noting how time and taxpayer intent can affect characterization.
3. Recognize the state of mind issues in the concept “held for productive use in trade or business or for investment” showing how qualifying use can ease qualification, list the differences between §1031 and old §1034, and state the same taxpayer requirement noting the unsettled caselaw.
4. List the statutory exclusions from §1031 and identify the types of property that are specifically excepted.
5. Identify the like-kind requirement as it impacts real estate and personal property exchanges, and recognize classification systems permitting clients to exchange like-kind or like-class personal property.
After studying the materials in Chapter 3, answer the exam questions 14 to 27.
Chapter 4 The Concept of “Boot”
At the start of Chapter 4, participants should identify the following topics for study:
* Partial tax-deferral
* Examples of boot
* Realized gain
* Recognized gain
* Limitation on recognition of gain under §1031
* The definition of “boot”
After reading Chapter 4, participants will be able to:
1. Define “boot” and like-kind property stating boot's potential impact on nonrecognition and list several examples of boot.
2. Locate and identify taxable "boot," list the differences between realized gain and recognized gain in stating the limitation on recognition of gain under §1031 that prevents a taxpayer from being taxed greater than if he had sold the property, and summarize taxable “boot’s” net effect.
After studying the materials in Chapter 4, answer the exam questions 28 to 31.
Chapter 5 The Rules of “Boot”
At the start of Chapter 5, participants should identify the following topics for study:
* Property boot
* Mortgage boot
* Debt relief
* Liability or notes created during the exchange
* Netting boot – the rules of offset
* Property boot given offsets any boot received
* Mortgage boot given offsets mortgage boot received
* Mortgage boot given does not offset property boot received
* R.R. 72-456 & commissions
* Net taxability of gain
After reading Chapter 5, participants will be able to:
1. Define mortgage boot and property boot identifying whether a taxpayer has given or received boot in an exchange and state the related tax consequences.
2. Identify the popular and alternate offset rules used to determine net boot, list techniques to limit net taxable boot such as adjusting mortgages before an exchange and treating closing costs according to R.R. 72-456, and state the taxability of gain rule to reflect netting.&