property disposition response
Babu Dev
WEEK7PropertyDispositionsRESPONSE.docxProperty Dispositions
250 WORD MIN RESPONSE
1. RESPONSE TO Firas Jawhari
Samuel is facing a form of asset disposition. No matter how that disposition will be realized, it will trigger a tax effect on that asset, and for that, it is important to determine whether that disposition will trigger a loss or a gain for Samuel. To determine that loss or gain, Samuel needs to first determine the amount realized from the disposition and the adjusted basis. The amount realized includes everything of value received by Samuel minus any disposition costs. The asset in question may be exchanged for cash or a similar asset. The adjusted basis is the cost of the asset. Samuel might have bought the land, in which case the adjusted basis is the cost he paid for the land, but he might have also received it through other means, like being a gift or through inheritance, in which the market value of the day he receives the gift or inheritance might be considered as the method used to determine the adjusted basis. The adjusted basis will then be the initial basis of the asset, minus any type of cost recovery deductions, such as depreciation. The gain or loss will represent the amount realized minus the adjusted basis. That gain or loss must then be reported on their tax return and will increase or decrease Samuel’s gross income. Samuel might be able to recognize all of it, defer some of it, or might even be able to exclude it (Spilker et al., 2015). If Samuel elected to accept the cash offer in exchange for the asset, he will realize a gain that will increase his taxable income. But he might be able to defer any recognized gain by either accepting the offer from the state or real estate agent, Slick Willy. In the first case, if the plan of the state went through, Samuel will be involuntarily disposing of his property when it will be seized by the state via eminent domain. And since the state might pay Samuel money for that asset, this is referred to as an indirect involuntary conversion. When Samuel meets this involuntary conversion requirement, he may elect to defer the realized gain on this conversion if he acquired a qualified replacement property within a certain period, generally between two to three years after the close of the tax year in which he received the money from the state. A replacement property is qualified if it was acquired to replace the property taken and was used the same way as the original property (Spilker et al., 2015). In the second case, if Samuel elected to accept Slick Willy’s offer (fantastic name by the way) and traded the property for a nice building in downtown Slidell, and based on the appraisal of the building, he might realize a gain from that exchange, but it will not generate the wherewithal (cash) for Samuel to pay taxes on that gain. Samuel might then be able to defer that gain using the like-kind exchange, known as the §1031 exchange, if the exchange met few requirements. First, the property was exchanged with a like-kind property, in which case the restaurant might save the day here; second, both exchanged properties will either be used in a business or held for investment, which is true; and third, the exchange must happen within a certain time frame, which could be achieved (Spilker et al., 2015). My advice is to either wait for the state to compensate Samuel for the land, or go with Slick Willy’s offer, keeping in mind the requirements needed to be able to defer any gains from one of these exchanges. Firas Jawhari Reference Spilker, B. C., Ayers, B. C., Barrick, J. A., Outslay, E., Robinson, J. R., Weaver, C. D., and Worsham, R. G. (2015). Taxation of Individuals and Business Entities: 2015 Edition (Sixth Edition). New York, New York, United States: McGraw-Hill Education.
2. RESPONSE TO Brian Luchini
