XYZ, CPAs
Sacramento, A
June 24, 2013
Relevant Facts
Owen and Lisa
exchanged business pickup trucks in 2012. The pickup truck given up by Lisa had
an adjusted basis of $ 2,000 and a fair market value of $ 6,000. In return for
this, she received Owen’s pickup truck which had a fair market value of $5,500
in addition to $500 in cash. The pickup truck given up by Owen had an adjusted
basis of $2500. Owen later sold the pickup truck he received from Lisa in March
2013 to a third party at $ 5,800.
Specific issues
What is the amount of Owen and Lisa’s gain recognition respectively for
2012?
What is the effect of Owen’s subsequent sale of his pickup truck in
March 2013?
Conclusions
The gain recognition for Lisa would be $ 500 while Owen does not have
any gain recognition in the exchange. The subsequently sale of the pickup truck
by Owen had the effect of creating a gain recognition of $ 2,800.
Support
The IRS considers
some exchanges as non taxable with the implication that gains from such
exchanges are not recognized. Similarly, losses from those exchanges are also
not deductible (IRS, 2013). One of the exchanges falling under this category
relates to the so called like-kind exchanges. This is where a property is
exchange for the same kind of property as in the present case where Lisa and
Owen were each exchanging a pickup truck for a pickup truck even if the
respective colors were not the same (IRS, 2013). The only two requirements is
that the traded property be a ‘qualifying’ and ‘like-kind’ respectively. The
qualifying property aspect insists that both the property traded and the one
received must be held for business purposes. The exchanges made by both Lisa
and Owen meet this requirement as the pickup trucks were meant for business. On
its part, the like-kind requirement stipulates that the properties involved be
of the same nature or character. Thus, the exchange of real property is
considered as meeting this requirement even if the quality of the properties
may not be the same. Similarly, a personal property with another personal
property also meets the requirement. Pickup trucks exchanged between Owen and
Lisa are both personal properties differing mainly in their color and quality
making both to meet the requirement of being like-kind property.
Furthermore, the
IRS also lists automobiles under the category of general asset classes under
the broader category of personal properties qualifying for like-kind
categorization. Pickup trucks definitely fall within this group (IRS, 2013).
The situation is,
however, different where one receives money in addition to the like-kind
property in the exchange. The IRS consider such cases to be partially taxable
exchanges and the gain is recognized to the extent of the money received (IRS,
2013). In the case of Lisa, the money received was $500 forming the gain
recognition. In contrast, money paid in a like-kind exchange does not elicit
any different treatment from a pure exchange of like-kind properties.
The non taxability
of like-kind exchange does not, however, exchange to gains in subsequent
dispositions or sales of the property to third parties. Thus, the subsequent
sale by Owen created a recognized gain with his basis adjusted by the amount $
500 he had to pay to Lisa while initially exchanging his pickup truck. The
recognized gain was, therefore, the difference between the $ 5,800 received
from the third party the adjusted basis of $ 3000($2,500+$500).
Action to be taken
Lisa and Owen still need to report their respective exchanges even where
no gains are recognized. This should be done in 8824, Like-Kind Exchanges (IRS,
2013).
Reference
Internal
Revenue Service (2013). Publication 544:
Sales and Other Dispositions of Assets. Retrieved
24 June, 2013, from http://www.irs.gov%2Fpub%2Firs pdf%2Fp544.pdf&ei=PKrHUZm2KsyZhQfRiIHoBg&usg=AFQjCNG
VhVzZpEfQO61LYZtkiPVDKPE7A
0 comments:
Post a Comment