A a similar exchange under the United States tax law, also known as 1031 exchange , is a transaction or set of transactions that allows for the disposal of assets and the acquisition of other substitute assets without generating liability current tax from first asset sale. A similar exchange can involve the exchange of one business to another business, one real estate investment property for another real estate investment property, a livestock for eligible livestock, and other qualified asset exchange. A similar exchange has been characterized as a tax break or a "tax loophole".
Video Like-kind exchange
AS. Kode Pajak bagian 1031
This kind of transaction is also called "1031 exchange", because of Internal Revenue Code section 1031 of U.S. Internal Revenue Code allows the owner of certain types of assets to defer capital gains tax on any similar property exchanges. Both the property is released and the property acquired must be of a kind, and must be owned for business or investment purposes. The amount of assets on each side of exchange should be the same value. Taxes on capital gains are not subject to the sale of the property if a qualified replacement property is obtained. The transaction must be well structured, including that the taxpayer can not be considered to have actually or constructively accepted the sale price of the disposed property. To avoid "constructive receipts" from the sale, neutral parties are often used to keep sales proceeds beyond the reach of taxpayers. The replacement property should generally be "identified" within 45 days from the moment the original property is transferred, and must be "obtained" within 180 days from the moment the original property is transferred. If the transaction is handled properly, the tax payment is deferred until the replacement property is then sold without reinvestment in the eligible property.
The idea behind this section of the tax code is that when an individual or business sells a property to buy another property, no economic benefits have been achieved. There are only transfers from one property to another. For example, if a real estate investor sells an apartment building to buy another, he will not be taxed on any profit he made in the original apartment building. When an investor sells an original apartment building and buys a new one, the value used from the original to buy a new one does not change - the only thing that has changed is where the value is.
Non-acknowledgment
A similar exchange is a type of "non-recognition provision". According to section 1001 (c) of the Internal Revenue Code, all realized gains and losses shall be recognized "except as provided in this subtitle". A similar exchange is one of the eligible exceptions, serving as a proto-typical "non-recognition" rule.
Non-acknowledgment is given on a similar exchange on the basis that the taxpayer's investment form is changed while the substance of the investment is not. In similar exchanges, realized gains or losses are usually never lost; on the other hand, unknown gains or losses are usually brought into new assets. When a new asset is sold or exchanged in a taxable transaction, the realized gains or losses of the first transaction will be recognized.
Maps Like-kind exchange
Primary considerations
Some requirements must be met in a similar exchange to ensure that tax liability is not made on the sale of the first asset:
- The property or assets sold ("old property") must be held for investment or used in commerce or business, and can not be a private residence.
- The property or asset purchased with the result ("new property") must be "similar" to the old property.
- The proceeds from the sale should be used to purchase the new property within 180 days of the sale of the old property, even though the new property must be identified within 45 days of the sale.
- Investors can not accept "constructive receipts" of money from the sale of old property.
What is "like kind"?
An important issue in similar exchanges is defining "similar properties". The tax code does not contain such a definition. Rule of Treasury § 1.1031 (a) -1 (b) offers little guidance, indicating that the term "kind" refers to "property character traits and not at their level or quality". But the regulation does not further define the nature, character, class or quality of the property. Instead, it states that "[o] type or property class can not be exchanged with properties of different class types".
The exchange of personal property (vehicles, equipment, intellectual property rights) is subject to stricter rules than real property exchanges, as governed by Regulation of Finance § 1.1031 (a) -2. Deprecated personal assets are generally regarded as a kind of other depreciable personal property that has the same "General Asset Class" in assigning classroom life for depreciation purposes. For intangible properties (and private properties that are not subject to depreciation), more general tests of "properties or characters" apply. While cattle may be eligible for similar exchange treatment, livestock of the opposite sex will not qualify as a kind.
Six types of property are not eligible for similar exchanges: (1) shares in trading or other property held primarily for sale; (2) shares, bonds, or records; (3) other securities or evidence of debt or interest; (4) interest in partnership; (5) a trust certificate or a profitable interest; and (6) choses in action.
Base of acquired property
Unrecognized earnings or unrecognized losses from similar exchanges are retained in newly accepted property on the exchange. The new property accepts the basis of the old property, which is adjusted for any other property granted or received in exchange (see below for further discussion of "boot").
The taxpayer basis in the new property is determined by starting with the taxpayer base on the old property that is exchanged. Adjustments are then made as necessary to take into account other properties that may be accepted on the exchange. By using the taxpayer base on the old property as a reference point for a new property base, unrecognized profits or losses are maintained.
For example, let's say a taxpayer swapped the $ 20,000 worth of old assets in which the taxpayer had a $ 14,000 base for similar assets. Assuming the exchange is eligible for non-recognition (based on how the taxpayer holds the old property and how the taxpayer intends to hold the new property), the realized profit of $ 6,000 will not be recognized, and the taxpayer's base in the new asset will be $ 14,000. Since a new asset is likely to have a value of $ 20,000 (in arms'-length transactions, both assets will be deemed to have the same value), an unknown gain of $ 6,000 is retained in the new asset. Thus, in a similar exchange, the exact amount of unrecognized gains or losses is maintained in the basis of the assets acquired in exchange.
Other properties provided or accepted on the exchange: "boot"
Sometimes taxpayers participating in similar exchanges receive cash or property other than similar properties. This unwanted property is referred to as "boot", (from the phrase "to boot", as in "I get property and other properties to boot"). However, when that happens, the taxpayer has not received such-kind property. Fortunately, the "ceiling rules" in section 1031 deal with this problem by giving recognized profits or losses, but only as far as the number of boots received.
For example, let's say a taxpayer receives a property-worthy worth of $ 12,000 and $ 8,000 in cash in exchange for an old property on a $ 14,000 basis. The basis in the new property is determined by reducing the cash received ($ 8,000) from the base in the old property ($ 14,000) and then adding a recognized profit ($ 6,000). Thus, on the sale of new property cash for a fair market value of $ 12,000, no gain or loss will be generated.
Assumptions of taxpayer obligations
Property that is transferred in a similar exchange is often burdened by obligations and debt, especially where the asset is real estate. In this case, the tax code treats the waiver of the debt in addition to cash in similar exchanges. In other words, the assumption of taxpayer debt is treated like a cash receipt by taxpayers.
For example, say a taxpayer has $ 20,000 worth of assets and a $ 8,000 base with a debt of $ 4,000. The asset trade taxpayer in exchange for similar properties is valued at $ 16,000, and the other party to the stock expressly assumes a $ 4,000 liability. The other party will not be willing to pay additional consideration in this transaction, because the taxpayer receives $ 16,000 of equity (property worth $ 20,000 but is subject to a $ 4,000 debt) instead of a $ 16,000 property. No additional consideration should be paid.
A boot receipt will trigger a profit recognition when the gain is realized on the exchange of the original asset, as shown above. Boot does not trigger an introduction when loss is realized.
For example: Ashley trades on a business truck with a customized base of $ 27,000 for another business truck worth $ 18,000 plus $ 2,000 cash. Ashley is aware of a $ 7,000 loss that is all suspended and no profits or losses are recognized. $ 2,000 cash only makes a difference in calculating realized losses, not being recognized.
Missing properties
Although taxpayers generally prefer not to get recognition for realized profits (so they do not have to recognize current profits and pay federal income taxes that are generated today), they usually prefer to recognize current realized losses to obtain tax benefits from faster reduction results. That means similar exchanges are bad news in case of realized losses. None of these losses will be recognized regardless of the received boot.
Losing property with a relative
Section 267 (a) of the tax code does not permit a deduction for losses resulting from the sale to the persons concerned. However, the basis of the property received by the taxpayer in a similar exchange with a relative is governed by section 1031. In other words, the stain of prohibition under section 267 does not carry over to the new asset. Losses are maintained in a new property base when new properties are sold.
Similar three-party type-exchange
In many cases, the two parties can not solve similar exchanges. For example, one party may not want to accept a similar property or may want to recognize a loss on a property that has decreased in value. Both parties may involve a third party who is willing to pay in cash (perhaps because the new property has a value that is less than the base of the old property, or because the taxpayers desire for cash exceeds the desire to minimize the liability for federal income tax). When a third party willing to pay in cash is involved, however, Ratification of Revenue 77-297 indicates that non-recognition will apply if the taxpayer acquires a new property solely for the purpose of exchanging it with similar property.
Similar suspended exchanges: time is money
In Starker v. United States of America, (see section 1031) the court declares that a taxpayer entitled to section 1031 is not recognized at the time of final receipt of a similar property, although the taxpayer in the case has transferred the property to the buyer and though the taxpayer has up to five years to identify the property replacement. Congress responds to this decision by setting a deadline on the identification and receipt of replacement property.
At this time, the taxpayer must identify the replacement property within 45 days of the transfer of the same property. The taxpayer must also receive the surrogate property within 180 days after the transfer of similar property.
Reporting
Due to periodic changes to the tax code, as well as detailed rules that contain a number of technical requirements, it is important to check the latest rules and regulations before proceeding with similar exchanges. The current rules require taxpayers to submit form 8824 to the IRS detailing the terms of the deal.
As a "tax break"
In 2013, expansion and exploitation by large companies of similar exchanges was originally intended to free family farmers from capital gains taxes when swapping land or cattle, to avoid taxes cited by The New York Times as an example of a need tax reform.
See also
- Fixed assets
- Alderson v. Commissioner
- Jordan Marsh Co. v. Commissioner
References
Source
- Samuel A. Donaldson, Individual Federal Income Taxes: Cases, Problems & amp; Material. Second edition. American Casebook Series, Thomson West: St. Paul, Minnesota, 2007, 558-571.
Source of the article : Wikipedia
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