Quiz 9: Nontaxable Exchanges

When unrelated parties agree to an exchange of noncash properties,the economic presumption is that the properties have the same adjusted book basis.

A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.

Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.

A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

Reiter Inc.exchanged an old forklift for new office furniture.This exchange qualifies as a nontaxable like-kind exchange.

Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

Gain realized on a property exchange that is not recognized is actually deferred rather than nontaxable.

Mrs.Cooley exchanged 400 shares of stock for corporate bonds.If the stock and bonds were issued by the same corporation,they are like-kind properties,and the exchange is nontaxable.

A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.

Tibco Inc.exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership.This exchange is taxable.

Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange of an old business asset for a new business asset.If the exchange is nontaxable,Signo has a $21,000 favorable permanent book/tax difference.

The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.

Mr.Lexon owns investment property with a $719,000 basis.If the property is worth only $500,000,Mr.Lexon would prefer a taxable disposition of the property over a like-kind exchange.

When unrelated parties agree to an exchange of noncash properties,the economic presumption is that the properties are of equal value.

Tax neutrality for asset exchanges is the exception rather than the rule.

Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the exchange of an old business asset for a new business asset.If the exchange is nontaxable,Tarletto's book basis in the new asset is $229,000 greater than its tax basis.

A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.

Muro Inc.exchanged an old inventory item for a new asset.If the new asset is also an inventory item,the exchange is nontaxable.

Yelano Inc.exchanged an old forklift used in its business for a new forklift.This exchange qualifies as a nontaxable like-kind exchange.

All types of business and investment real properties are like-kind.