49 MODULE 34 TAXES: TRANSACTIONS IN PROPERTY

_ _B _
FMV of real estate received A_ $70,000 .
+ Liability on old real estate assumed by
$65,000
other party (boot received) 15.00 (1) 10.000
Amount realized on the exchange 0 $80,000
- Adjusted basis of old real estate transferred
- Liability assumed by taxpayer on new real $80,000 -.60,000
estate (boot given) -10.000 (2) -15.000
Gain realized $ 5.000
-50,000
$20.000 $ ".
Gain recognized (1) minus (2) $ 5.000 $60,000
Basis of old real estate transferred $50,00
+ Liability assumed by taxpayer on new real 15,000
010,000
estate (boot given) 5,000·
+ Gain recognized
- Liability on old real estate assumed by
other party (boot received) -15.000 -10.000
Basis of new real estate acquired $50 000 $65 000
(d)' Boot given in the form of an assumption of a liability does not offset boot received in the
form of cash or unlike property; however, boot given in the form of cash or unlike prop-
erty d.oes offset boot received in the form of a liability assumed by the other party.
EXAMPLE: Assume the same facts as above except that the mortgage on B's old real estate was $6,000,
and that A paid B casn of $4,000 to make up the difference. The tax effects to A remain unchanged.
. (11)However,
If withinsince
twotheyears
$4,000after
cash cannot be offset
a like-kind by the liability
exchange assumed
between by B, B
related must recognize
persons a gain of
[as defined
Sec.in
267 (b)] either person disposes of the property received
$4;000, and will have a basis of $69,000 for the ne,w real estate.
iri the exchange, any gain.
or loss that'
was not recognized on the exchange must be recognized (subject to the loss limitation rules
for related persons) as of the date that the property was disposed of. This gain recognition rule
does not apply if the subsequent disposition was the result of the death of one of the persons,
an involuntary conversion, or where neither the exchange nor the disposition had tax avoid-
ance as one of its principal purposes.

b., .Involuntary conversions

(1) Occur when money' or other property is received for property that has been destroyed, dam-
aged, stolen, or condemned (even if property is transferred only under threat or imminence of
condemnation).

(2) . If payment is received and gain is realized, taxpayer may elect not to recognize gain if con-
verted property is replaced with property of similar or related use .

(a) Gain is recognized only to the extent that the amount realized exceeds the cost of the re-
placement.

(b) The replacement must be purchased within a period beginning with the earlier of the date
of disposition or the date of threat of condemnation, and ending two years after the close
of the taxable year in which gain is first realized (three years for condemned business or
investment real property, other than inventory or property held primarily for resale) .

. (c) Basis of -replacement property is the cost of the replacement decreased by any gain not
recognized.
EXAMPLE: Taxpayer had unimproved real estate (with an adjusted basis of $20,000) which was con-
demned. by the county. The county paid him $24,000 and he reinvested $21 : 000 in unimproved real es-
tate. $1,000 of the $4,000 realized gain would not be recognized. His tax basis in the new real estate
would be $20,900 ($21,000 cost - $1,000 deferred gain).

EXAMPLE: Assume the same facts as above except the taxpayer reinvested $25,000 in unimproved real
- estate. None of the $4,000 realized gain would be recognized. His basis in the new real estate would be
$21,000 ($25,000 cost - $4,000 deferred gain).

(3) If property is converted directly into property similar or related in service or use, complete
nonrecognition of gain is mandatory. The basis of replacement property is the same as the
property converted.

(4) The meaning of property similar or related in service or use is more restrictive than "like-
kind."