Question

1. How is the basis for depreciation determined for depreciable gift property?

2. How are gains and losses treated for exchanges of stock that is held for investment?

3. What are the requirements for property to qualify for like-kind exchange treatment?

4. When tax-exempt municipal bonds (that have a five-year maturity date) are purchased at a $1,000 premium, how much interest income is taxed and how much premium should be amortized in calculating the adjustment to basis annually? (Assume you are using the straight-line method of amortization)

Answer 1

1.

Suppose your dad gifts you a house which he had purchased for $1000 and on the day your dad gifts this house to you the value(fmv) of this house remains $700(after depreciation) now this $700 becomes value of gift, if you sell it in $800 you've Capital gain of $100 and if you sell it in $600 Capital loss will be $100.

Simply we can say that the value of deprecaible gift is calculated as on the date of acquisition. Now this acquisition value will be considered as base value in all the tax calculations.

3.

A like-kind property refers to two assets that are considered to be the same type, making an exchange between them tax deferrable. The two assets must be of the same type but do not need to be of the same quality to qualify as like-kind property.

Taxpayers must exchange properties that are of like-kind. Generally, all real estate is like-kind to other real estate. For personal property, the like-kind assets may be classified by a General Asset Class (GAC) and if not matched there, then by North American Industry Classification System (NAICS) Product Class. If the personal property assets are not found in the GAC or NAICS, then a general like‐kind analysis may be made.

The six criteria that must be met for an exchange to qualify under section 1031 are:

Like kind Requirements

Tax payers must exchange properties of like kind

Purpose Requirement

Assets to be exchanged must have been held for productive use in business or trade.

Holding requirement

As per section 1031 there's no holding period that is specifically defined. Generally, a rough rule of thumb is a holding period of two years or more.

Exchange requirements

An exchange must take place in which one property is exchanged for another of like-kind. More than one property may be sold or acquired through a 1031 exchange

Time limits & identification requirement

A taxpayer is required to acquire or identify the target replacement property within 45 days after the transfer of the relinquished property. Properties acquired within the 45-day designation period are deemed to be identified.

Replacement property must be designated in a written document, unambiguously described, signed by the taxpayer and received by the qualified intermediary on or before the 45th day.

If the taxpayer identifies replacement property within the designation period, the exchange periodend date may be extended up to 180 days from the transfer of the first relinquished property

No constructive or actual receipt of exchange funds

It is a violation if the taxpayer or an agent for the taxpayer receives exchange funds or the taxpayer is directly or indirectly able to control the exchange funds during the exchange period.

Use of a qualified intermediary

An unrelated third party or “qualified intermediary” (QI) may be used to facilitate the 1031 exchange transaction. A taxpayer cannot utilize their Realtor, lawyer, accountant or a related party as a QI. Additionally, several states require that QIs be compliant with regulatory requirements regarding insurance, bonding, and the manner in which exchange funds are held, state licensing, etc.