Question

1. Discuss the characteristics of a like kind asset. Must the asset received in a like kind exchange be an exact duplicate of the asset given ? Explain
2. When faced with an involuntary conversion, does the taxpayer have an unlimited amount of time to replace the converted property? Explain.
3. What happens in the following circumstances if a wife , prior to marriage, uses the exclusion on the sale of a residence and subsequently ( after marriage) sells a second residence within two years?
a. the new husband sells a residence.
b. the new husband dies within two years and the wife sells the residence.

Answer 1

1. Like kind property is an asset refers to two real estate assets of a similar nature regardless of grade or quality that can be exchanged without incurring any tax liability.

Properties must be held for business or investment purposes but do not need to be similar in grade or quality

This is known as a tax-deferred or 1031 exchange under Section 1031 of the U.S. tax code, allowing the seller to avoid paying capital gains on the exchange.

Many people believe that like-kind properties must be of the same size or type to qualify. But that's not true—different assets can be exchanged as long as they qualify.

2. Involuntary conversion generally refers to a forced payment for property when that property is damaged or stolen. It is a common insurance term. Involuntary conversions typically also have taxation implications. Any compensation an owner receives in exchange for property lost is associated with the “conversion" part of an involuntary conversion. Conversions may include cash payments from insurance policies and potentially accounting for replacement property. Without an insurance policy or other conversion agreement in place, involuntary damages or theft would simply result in a loss.

3.

a) She will be up for capital gains

b) she will not be up for capital gains tax