Chapter 15 Property Transactions: Nontaxable Exchanges
Chapter Introduction
Learning Objectives
After completing Chapter 15, you should be able to:
LO.1Explain the rationale for nonrecognition (postponement) of gain or loss in certain property transactions.
LO.2Apply the nonrecognition provisions and basis determination rules for like-kind exchanges.
LO.3Explain the nonrecognition provisions available on the involuntary conversion of property.
LO.4Describe the provision for the permanent exclusion of gain on the sale of a personal residence.
LO.5Apply various tax planning opportunities related to the nonrecognition provisions discussed in the chapter.
The Big Picture
Alternative Uses of Property
Iain Masterton/Alamy Stock Photo
Recall the situation introduced in The Big Picture in Chapter 14. After 11 months, Alice has changed her mind about selling the house to her nephew. Several weeks ago, it was announced that the development Alice’s inherited house is in will be expanding to include a PGA-sponsored 72-hole golf course, a new conference facility, and a variety of other amenities. As a result, the appraised value of Alice’s inherited house has increased to $800,000. Alice has decided that she needs to do something with the house other than let it remain vacant. She is considering the following options and has come to you for advice.
Sell the house for approximately $800,000 using the services of a real estate agent. The real estate commission rate is 5 percent, and her inherited basis is $475,000.
Convert the house to a vacation home (100 percent personal use by Alice and her family); then sell it in two years.
Convert the house to a vacation home (projected 40 percent rental use and 60 percent personal use); then sell it in two years.
Sell her current home and move into the inherited house. She has owned and lived in her current home for 15 years, and her realized gain on the sale would be about $200,000. Because she is nearing retirement, she would live in the inherited house for only the required period to ensure any tax benefits on its sale and then sell it.
Alice, who currently faces a 24 percent marginal tax rate, expects the inherited house to continue to appreciate in value by about 5 percent per year. She plans on retiring from her job in two years and moving to a warmer climate. Until then, she is neutral as to which house she lives in. What advice can you offer Alice?
Read the chapter and formulate your response.
