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Basis of Property Acquired in Like-Kind Exchanges
The basis of property acquired in a like-kind exchange to which Code Sec. 1031 applies is the same as the adjusted basis of the relinquished property, increased by any additional consideration given for the property acquired. Commissions paid are added to basis.
If gain is recognized on account of the receipt of money or other boot, the basis of all the property received is the adjusted basis of the relinquished property increased by the gain recognized and decreased by the money received.
The following is a simple formula for determining the basis of property acquired in a nontaxable trade-in exchange:
| Adjusted basis of relinquished property |
___________ |
| Add: |
|
| Cash or non-like kind property given |
___________ |
| Gain recognized |
___________ |
| Total |
___________ |
| Deduct: |
|
| Cash or non-like kind property received |
___________ |
| Loss recognized on non-like kind property given
(excess of adjusted basis over trade-in allowance) |
___________ |
| Basis of new property |
___________ |
Example: A exchanges real estate held for investment plus marketable securities for real estate to be held for investment. The real estate transferred has an adjusted basis of $10,000 and a fair market value of $11,000. The securities transferred have an adjusted basis of $4,000 but a fair market value of $2,000. The real estate acquired has a fair market value of $13,000. A is deemed to have received a $2,000 portion of the acquired real estate in exchange for the stock, since $2,000 is the fair market value of the stock at the time of the exchange. (A $2,000 loss is recognized on the exchange of the stock for real estate.) The basis of the real estate acquired by A is determined as follows:
| Adjusted basis of real estate transferred |
$10,000 |
| Adjusted basis of stock transferred |
$4,000 |
| Total |
$14,000 |
| Less: Loss recognized on transfer of stock |
$2,000 |
| Basis of real estate acquired |
$12,000 |
If more than one property to which the nonrecognition rules apply is received, the basis is allocated among those properties in proportion to their fair market values at the date of the exchange.
The rules for allocating basis may produce unexpected tax consequences. For example, assume a taxpayer exchanges unimproved investment real estate (basis of $15,000 and a fair market value of $30,000) for an apartment building (land valued at $10,000 and building at $20,000). The property acquired takes the $15,000 basis of the property transferred, allocated on the basis of their relative fair market values on the date of the exchange. Therefore, the basis allocated to the land is $5,000 ($10,000/$30,000 × $15,000) and the basis allocated to the building is $10,000 ($20,000/$30,000 × $15,000). In this case, the taxpayer converted nondepreciable basis to largely depreciable basis.
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