As a tax practitioner, you often get people asking questions concerning the tax
ID: 2473152 • Letter: A
Question
As a tax practitioner, you often get people asking questions concerning the tax effect of property transactions. This year is no exception. You've had individual clients ask you the following questions: I. During the course of the year, I swapped some property for what I consider to be similar property. Is this a taxable event? If so, how do I calculate my gain, if any, and my basis in the property that I received? II. I own part of a C corporation. During the year, the corporation sold me some property at a loss. What are the tax consequences of this transaction to me and the corporation? Answer each of these questions, explaining the rules that apply to each property transaction and the possible tax consequences of each.
Explanation / Answer
Part 1)
No, this is not a taxable event. In the given case, you will not realize any gain or loss on the swap transaction as the property of similar nature was exchanged. This transaction will quality as like-kind exchange as per Section 1031 of IRC and you will be able to defer the tax on gain which may arise because of difference between the values of 2 properties involved in the transaction. In simple words, no capital gain will be recognized at the time of exchange and hence, there will be no capital gain tax liability. The basis of the new property will be the same as the basis of the old property (or property given up).
_________
Part 2)
The loss will not be allowed as a deduction under section 267 of IRC. It is so because the transaction has occurred between the related parties (the corporation and you). In this case, the corporation will not realize any gain or loss, therefore, there will be no tax liability on the corporation. The value of loss can be adjusted against the gain (if any) that may be realized when the asset is sold by you in the future to reduce the tax liability (Section 267 D).
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