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IRS.gov Website
Publication 225
taxmap/pubs/p225-037.htm#en_us_publink1000218324

Chapter 8
Gains and Losses(p49)


What’s New for 2018(p49)

rule
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Like-kind exchanges.(p49)
For exchanges completed after December 31, 2017, the nonrecognition rules for like-kind exchanges apply only to exchanges of real property not held primarily for sale. The nonrecognition rules no longer apply to personal property. Exceptions apply to property disposed of before January 1, 2018, and to property received in an exchange before January 1, 2018. See Like-Kind Exchanges, later.

taxmap/pubs/p225-037.htm#en_us_publink1000272062Introduction

This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Ordinary gain is taxed at the same rates as wages and interest income while net capital gain is generally taxed at a lower rate. Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange.

taxmap/pubs/p225-037.htm#TXMP3a4af9af

Useful items

You may want to see:


Publication
 334 Tax Guide for Small Business
 523 Selling Your Home
 544 Sales and Other Dispositions of Assets
 550 Investment Income and Expenses
 908 Bankruptcy Tax Guide
Form (and Instructions)
 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
 Sch D (Form 1040): Capital Gains and Losses
 Sch F (Form 1040): Profit or Loss From Farming
 1099-A: Acquisition or Abandonment of Secured Property
 1099-C: Cancellation of Debt
 4797: Sales of Business Property
 8824: Like-Kind Exchanges
 8949: Sales and Other Dispositions of Capital Assets
 8960: Net Investment Income Tax-Individuals, Estates, and Trusts
See chapter 16 for information about getting publications and forms.
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Sales and Exchanges(p49)

rule
If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible.
A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. An exchange is a transfer of property for other property or services.
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Determining Gain or Loss(p49)

rule
You usually realize a gain or loss when you sell or exchange property. If the amount you realize from a sale or exchange of property is more than its adjusted basis, you have a gain. If the adjusted basis of the property is more than the amount you realize, you have a loss.
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Basis and adjusted basis.(p49)

rule
The basis of property you buy is usually its cost. The adjusted basis of the property is the basis plus certain additions and minus certain deductions. See chapter 6 for more information about basis and adjusted basis.
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Amount realized.(p49)

rule
The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.
If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Pub. 544.
taxmap/pubs/p225-037.htm#en_us_publink1000218329

Amount recognized.(p49)

rule
Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. A recognized gain is a gain you must include in gross income and report on your income tax return. A recognized loss is a loss you deduct from gross income. However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. See Like-Kind Exchanges next. Also, a loss from the disposition of property held for personal use is not deductible.
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Like-Kind Exchanges(p49)

rule
Generally, if you exchange real property you use in your business or hold for investment solely for other business or investment real property of a like-kind, you do not recognize the gain or loss from the exchange. However, if you also receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange. And, you do not recognize any loss. In general, your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive in the exchange. See Qualifying property later for details on property that qualify and exceptions.
Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive in the exchange.
The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following (discussed later). For more information on like-kind exchanges, see Pub. 544.
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Multiple-party transactions.(p50)

rule
The like-kind exchange rules also apply to property exchanges that involve three- and four-party transactions. Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section.
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Receipt of title from third party.(p50)
If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements.
taxmap/pubs/p225-037.htm#en_us_publink1000218333

Basis of property received.(p50)

rule
If you receive property in a like-kind exchange, generally the basis of the property will be the same as the basis of the property you gave up. See chapter 6 for more information on basis.
taxmap/pubs/p225-037.htm#en_us_publink1000218334

Money paid.(p50)

rule
If, in addition to giving up like-kind property, you pay money in a like-kind exchange, the basis of the property received is the basis of the property given up, increased by the money paid.
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Example.(p50)

You own farmland with a barn. The combined adjusted basis of the properties is $70,000 and the fair market value is $150,000. You are interested in another tract of farmland, with a larger barn, worth $200,000. You exchange your existing property and $50,000 in cash for the new property. Your basis in the new property is $120,000 ($70,000 adjusted basis in your old property plus $50,000 in cash paid).
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Reporting the exchange.(p50)

rule
Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. The Instructions for Form 8824 explain how to report the details of the exchange.
If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. See chapter 9 for more information.
taxmap/pubs/p225-037.htm#en_us_publink1000218337

Qualifying property.(p50)

rule
In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Buildings, land, and rental property are examples of property that may qualify.
taxmap/pubs/p225-037.htm#en_us_publink10005606
Exchanges started in 2017 and completed in 2018.(p50)
The like-kind exchange rules still apply to a qualifying exchange of personal or intangible property if you disposed of the exchanged property before January 1, 2018, or received replacement property before January 1, 2018.
taxmap/pubs/p225-037.htm#en_us_publink10005607
Nonqualifying property.(p50)
The rules for like-kind exchanges do not apply to exchanges of the following property.
You may have a nontaxable exchange under other rules. See Other Nontaxable Exchanges in chapter 1 of Pub. 544.
taxmap/pubs/p225-037.htm#en_us_publink10005608
Special rule for stock in a mutual ditch, reservoir, or irrigation company. (p50)
For purposes of real property, stock in a mutual ditch, reservoir, or irrigation company is treated as real property if both of the following conditions are met at the time of the trade.
  1. The mutual ditch, reservoir, or irrigation company is an organization described in section 501(c)(12)(A) of the Internal Revenue Code (determined without regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses).
  2. The shares in the company have been recognized by the highest court of the state in which the company was organized or by applicable state statute as constituting or representing real property or an interest in real property.
taxmap/pubs/p225-037.htm#en_us_publink1000218339

Like-kind property.(p50)

rule
To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Generally, real property exchanged for real property qualifies as an exchange of like-kind property. For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange.
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Note.(p50)
Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange.
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Partially nontaxable exchange.(p50)

rule
If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. If you realize a loss on the exchange, no loss is deductible. However, see Unlike property given up below.
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Example 1.(p50)

You trade farmland that cost $130,000 for $10,000 cash and other land to be used in farming with an FMV of $150,000. You have a realized gain of $30,000 ($150,000 FMV of new land + $10,000 cash − $130,000 basis of old farmland = $30,000 realized gain). However, only $10,000, the cash received, is recognized (included in income).
taxmap/pubs/p225-037.htm#en_us_publink1000218346

Example 2.(p50)

Assume the same facts as in Example 1, except that, instead of money, you received a tractor with an FMV of $10,000. Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property).
taxmap/pubs/p225-037.htm#en_us_publink1000218347

Example 3.(p50)

Assume in Example 1 that the FMV of the land you received was only $115,000. You have a realized loss of $5,000 ($115,000 FMV + $10,000 cash – $130,000 basis of old farmland = $5,000 loss). However, your $5,000 loss is not recognized.
taxmap/pubs/p225-037.htm#en_us_publink1000218348
Unlike property given up.(p50)
If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property.
taxmap/pubs/p225-037.htm#en_us_publink100068812
Liabilities(p50)
If, in a like-kind exchange, you transfer property subject to debt, the debt transferred is considered the same as the receipt of unlike property. For purposes of figuring your realized gain, add any liabilities assumed by the other party to your amount realized. Subtract any liabilities of the other party that you assume from your amount realized. For more information, see Partial Nontaxable Exchanges in chapter 1 of Pub. 544.
taxmap/pubs/p225-037.htm#en_us_publink1000218349

Like-kind exchanges between related persons.(p50)

rule
Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition. The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange.
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Related persons.(p50)
Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.
For the complete list of related persons, see Related persons in chapter 2 of Pub. 544.
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Example.(p50)

You own real property used in your business. Your sister owns real property used in her business. In December 2018, you exchanged your property plus $15,000 for your sister's property. At that time, the fair market value of your real property was $200,000 and its adjusted basis was $65,000. The fair market value of your sister's real property was $215,000 and its adjusted basis was $70,000. You realized a gain of $135,000 (the $215,000 fair market value of the real property received, minus the $15,000 you paid, minus your $65,000 adjusted basis in the property). Your sister realized a gain of $145,000 (the $200,000 fair market value of your real property, plus the $15,000 you paid, minus her $70,000 adjusted basis in the property).
However, because this was a like-kind exchange and you received no cash or non-like kind property in the exchange, you recognize no gain on the exchange. Your basis in the real property you received is $80,000 (the $65,000 adjusted basis of the real property given up plus the $15,000 you paid). Your sister recognizes gain only to the extent of the money she received, $15,000. Her basis in the real property she received was $70,000 (the $70,000 adjusted basis of the real property she exchanged minus the $15,000 received, plus the $15,000 gain recognized).
In 2019, you sold the real property you received to a third party for $220,000. Because you sold property you acquired from a related party (your sister) within 2 years after the exchange with your sister, that exchange is disqualified from nonrecognition treatment and the deferred gain must be recognized on your 2019 return. On your 2019 tax return, you must report your $135,000 gain on the 2018 exchange. You also must report the gain on the 2019 sale on your 2019 return. Additionally, your sister must report on her 2019 tax return gain of $130,000, which is the $145,000 gain on the 2018 exchange, minus the $15,000 she recognized in 2018. Her adjusted basis in the property is increased to $200,000 (its $70,000 basis plus the $130,000 gain recognized).
taxmap/pubs/p225-037.htm#en_us_publink1000218352
Exceptions to the rules for related persons.(p51)
The following property dispositions are excluded from these rules.
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Multiple property exchanges.(p51)

rule
Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following.
For more information, see Multiple Property Exchanges in chapter 1 of Pub. 544.
taxmap/pubs/p225-037.htm#en_us_publink1000218354

Deferred exchange.(p51)

rule
A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. The property you receive is replacement property. The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met.
For more information, see Deferred Exchanges in chapter 1 of Pub. 544.
taxmap/pubs/p225-037.htm#en_us_publink1000218355

Transfer to Spouse(p51)

rule
Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. This rule does not apply in the following situations.
For more information and special rules for transfers of property incident to divorce, see Property Settlements in Pub. 504, Divorced or Separated Individuals.
Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. This rule applies for determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis.