Property transactions
The Nontaxable Exchange
Realized gain is deferred, not erased: recognize only up to boot, and carry the deferred gain into a substituted basis.
How the exam words it
- -The stem swaps real property and asks for the recognized gain or the new basis under section 1031.
- -Boot (cash or debt relief) is received in the exchange.
- -Property is involuntarily converted (condemned or destroyed) and reinvested under section 1033.
- -A principal residence is sold and it asks how much gain the section 121 exclusion covers.
The playbook
- 1Under section 1031 (real property held for business or investment), recognize the lesser of realized gain or boot received and defer the rest; like-kind now means real property only.
- 2Compute the new basis as the old basis plus gain recognized minus boot received, which preserves the deferred gain in the replacement property.
- 3Under section 1033, defer gain on an involuntary conversion when the proceeds are reinvested in qualifying replacement property within the window (generally 2 or 3 years).
- 4Under section 121, exclude up to $250,000 of gain ($500,000 for a married couple filing jointly) on a principal residence owned and used 2 of the last 5 years.
The trap
Recognizing gain up to the full fair value in a section 1031 exchange. Gain is recognized only to the extent of boot received, never more than the realized gain, and a realized loss is not recognized.
How the exam varies it
The same pattern, re-skinned along these axes:
Section 1031 like-kind versus section 1033 involuntary conversion versus section 121 residenceRecognized gain versus the substituted basisBoot received versus no boot
Drill this pattern
8 questions of The Nontaxable Exchange from across the AUD topics. Clear it by getting 5 right with a streak of 3.