Property Transfers and Exchanges

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Slide 1

This is a scene that introduces the setting for the scenario.

It has a shot of the tax firm and a welcome message. There is a button to start labeled “Begin.”

Slide 2

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Inside the accounting firm, in a conference room.

Wade speaking to Carmen

Wade: Hi, Carmen. Great job resolving the issues from last week with Randy Charles.

There are many tax credits available for small businesses bundled within the general business tax credit. Although we advised him of the work opportunity, employer pension, child care and rehabilitation credits, there are many more. Even though we recommended several specific credits, there are more than twenty-five credits available to taxpayers ranging from low income housing, research, to energy efficiency credits. Perhaps, we should provide a list of all of the credits available so they are at his disposal.

Carmen: I agree, because we want to make sure he considers all of the other possibilities.

Wade: All right, Carmen, let’s get started with our work for this week. Our focus will be on Property Transactions.

Carmen: Okay, great!

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Wade and Carmen in his office

Wade: Jonathon Dixon has returned to the office to discuss property issues related to a recent inheritance. A deceased relative left him a house, a boat, funds from a 401k, and rental property. I will set up the meeting for this afternoon.

Carmen: All right! Thanks Wade!

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Scene 3

Wade, Carmen and Jonathan Dixon in the conference room.

Wade: Jonathan, it's good to see you again.

Jonathan Dixon: It's good to see you as well. I didn't think I would be back so soon, but this occurrence was unexpected.

Wade: Please accept our condolences for your loss. Can you please share your concerns with Carmen, and I'll take my usual back seat.

Jonathan Dixon: Thank you, Wade.

Carmen: Mr. Dixon, How can we assist you?

Jonathan Dixon: As you are aware, a deceased relative left me a house, a boat, funds from a 401k, and rental property. My cousin would like to trade unimproved property for the rental property.

I am also contemplating selling the house and boat and would like to find out what the tax implications are.

One of my relatives is interested in purchasing the boat. I’d like to find out if there are any additional considerations if I make the sale to a relative instead of a third party.

Carmen: We can certainly help you make these decisions.

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Key Chapter provisions

Title: Property Transactions

Introduction: The income tax consequences of transferring property depends upon the basis of the property, the date of disposition, and the determination of realized and recognized gain. The amount realized is the excess of the selling price over the property's adjusted basis.

Tab 1: The fair market value of property received in a sale or disposition has been defined by the courts as the price at which property will change hands between a seller and willing buyer.

Tab 2: Adjusted basis is the original cost of the property on the date the property was acquired by the taxpayer plus capital improvements less accumulated depreciation.

Tab 3: Realized losses from the sale, exchange, or condemnation of personal use assets are not recognized for tax purposes.

Tab 4: When a taxpayer receives property as a gift, a basis is assigned to the property depending on the date of the gift, the basis of the donor, the amount of gift taxes paid, and the fair market value of the property.

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From the information provided, what are the gain and loss considerations for inheriting and the subsequent selling of the property?

1. The basis of property acquired from a decedent is generally the property's fair market value at the date of death; however, an alternate date known as the alternate valuation date can be used.

2. The holding period of the property is determined by the length of time the donor held the property in determining short- or long-term gain or loss.

3. Realized losses from the sale or exchange directly or indirectly between related parties are not recognized.

4. A taxpayer who replaces a productive asset used in a trade or business with another asset is considered a non-taxable exchange, since it is considered a continuation of the old investment. No gain or loss is recognized until the asset is later sold.

5. If a taxpayer inherits a traditional IRA from any other person other than a deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

Carmen: In reference to selling the boat to a relative, the same tax treatment will apply to the relative or a third party unless there is a loss on the sale.

The rental property can be exchanged for unimproved land that you also plan to use in business as a like-kind exchange. No gain or loss would be recognized until the property is sold in the future.

The inherited IRA would be taxable as a distribution unless the IRA was transferred directly to another trustee and remained in the name of the deceased. Making this transfer would avoid being taxed on the IRA until you receive subsequent distributions. The house would have the same cost basis of the donor and would also receive non-taxable treatment until it is later sold.

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Carmen and Wade in Wade's office

Wade: Carmen, I agree with your advice to Jonathon. Let’s review a draft of his tax return and determine what other tax planning strategies we can develop to minimize his tax liability.

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Carmen, Jonathan Dixon, and Wade in the conference room

Carmen: Mr. Dixon, in reference to your concern about selling the boat to a relative, the tax consequences would be the same as selling it to a third party unless you sell it at a loss.

The transfer of business property for similar business property would be a non-taxable transaction.

The IRA presents another issue. If you have not taken the distribution, it is possible to defer the taxes until a later date, but the transfer would have to remain in the deceased relative's name and be transferred directly by the trustee.

Jonathon Dixon: Thanks, Carmen. I appreciate the advice.

Carmen: You’re most welcome! Let me know if there is anything else you need.

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Wade in his office

Wade: Well, it's approaching the end of the day. We have reviewed the complexity of determining holding periods as well as gains and losses for personal and business use assets. I recommend that you continue to review the contents of Publication Seventeen to prepare for our next topic which will be Property Transactions: Capital Gains and Losses, Section Twelve-Thirty-One and Recapture Provisions.

By the way, don’t forget to participate in this week’s discussion questions.

I’ll see you next week!