Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, youusually have a gain or a loss. This section explains some of the rulesfor determining whether any gain you have is taxable, and whether anyloss you have is deductible. A sale is a transfer of property for money or a mortgage, note, orother promise to pay money. An exchange is a transfer of property forother property or services. Determining Gain or Loss You usually realize a gain or loss when you sell or exchangeproperty. A gain is the amount you realize from a sale or exchange ofproperty that is more than its adjusted basis. A loss is the adjustedbasis of the property that is more than the amount you realize. See chapter 7for the definition of basis, adjusted basis, and fairmarket value. Amount realized.The amount you realize from a sale or exchange is the total of allmoney you receive plus the fair market value of all property orservices you receive. The amount you realize also includes any of yourliabilities that were assumed by the buyer and any liabilities towhich the property you transferred is subject, such as real estatetaxes or a mortgage. If the liabilities relate to an exchange of multiple properties,see Treatment of Liabilities under Multiple PropertyExchanges flughafen hotel Helsingorin chapter 1 of Publication 544. Amount recognized.Your gain or loss realized from a sale or exchange of property isusually a recognized gain or loss for tax purposes. A recognized gainis a gain that you must include in gross income and report on yourincome tax return. However, depending on your other income and lossesfor the year, this amount may or may not be taxed. A recognized lossis a loss that you deduct from gross income. For example, if yourrecognized gain from the sale of your tractor is $5,300, you includethat amount in gross income on Form 1040. However, your gain or lossrealized from certain exchanges of property is not recognized for taxpurposes. See Like-Kind Exchanges, next. Also, a loss fromthe disposition of property held for personal use is not deductible. Like-Kind Exchanges Certain exchanges of property are not taxable. This means that anygain from the exchange is not taxed, and any loss cannot be deducted.Your gain or loss will not be recognized until you sell or otherwisedispose of the property you receive. The exchange of property for the same kind of property is the mostcommon type of nontaxable exchange. To be a like-kind exchange, theproperty traded and the property received must be both of thefollowing. Qualifying property. Like property. These two requirements are discussed later. discount hotels in ParisAdditional requirements apply to exchanges in which the propertyreceived is not received immediately upon the transfer of the propertygiven up. See Deferred exchanges, later. If the like-kind exchange involves the receipt of money or unlikeproperty or the assumption of your liabilities, you may have arecognized gain. See Partially nontaxable exchange, later. Multiple-party transactions.The like-kind exchange rules also apply to property exchanges thatinvolve three- and four-party transactions. Any part of thesemultiple-party transactions can qualify as a like-kind exchange if itmeets all of the requirements described in this section. Receipt of title from third party.If you receive property in a like-kind exchange and the other partywho transfers the property to you does not give you the title but athird party does, you may still treat this transaction as a like-kindexchange if it meets all the requirements. Basis of property received.If you acquire property in a like-kind exchange, the basis of thatproperty is the same as the basis of the property you transferred. Seechapter 7for more information about basis. Money paid.If, in addition to giving up like property, you pay money in alike-kind exchange, you still have no recognized gain or loss. Thebasis of the property received is the basis of the property given up,increased by the money paid. Example.Bill Smith trades an old tractor for a new one. The new tractorcosts $10,800. He is allowed $2,000 for the old tractor and pays$8,800 cash. He has no recognized gain or loss on the transactionregardless of the adjusted basis of his old tractor. If Bill sold theold tractor to a third party for $2,000 and bought a new one, he wouldhave a recognized gain or loss on the sale of his old tractor equal tothe difference between the amount realized and the adjusted basis ofthe old tractor. Reporting the exchange.Report the exchange of like-kind property on Form 8824.The instructions for the form explain how to report the detailsof the exchange. Report the exchange even though no gain or loss isrecognized. If you have any taxable gain because you received money or unlikeproperty, report it on Schedule D (Form 1040) or Form 4797, whicheverapplies. You may also have to report the taxable gain as ordinaryincome because of depreciation recapture on Form 4797. See chapter 11for more information. Qualifying property.In a like-kind exchange, both the property you give up and theproperty you receive must be held by you for investment or forproductive use in your trade or business. Machinery, buildings, land,trucks, and rental houses are examples of property that may qualify. The rules for like-kind exchanges do not apply to exchanges of thefollowing property. Property you use for personal purposes, such as your homeand your family car. Stock in trade or other property held primarily for sale,such as crops and produce. Stocks, bonds, notes, or other securities or evidences ofindebtedness, such as accounts receivable. Partnership interests. However, you might have a nontaxable exchange under otherrules. See Other Nontaxable Exchanges in chapter 1 ofPublication 544. Like property.To qualify as a nontaxable exchange, the properties exchanged mustbe of "like kind" as defined in the income tax regulations.Generally, real property exchanged for real property qualifies as anexchange of like-kind property. Depreciable tangible personal propertycan be either "like kind" or "like class" to qualify fornontaxable exchange treatment. See Personal property, next. Personal property.Like-class properties are depreciable tangible personal propertieswithin the same General Asset Class or Product Class. General Asset Classes.General Asset Classes describe the types of property frequentlyused in many businesses. They include the following property. Office furniture, fixtures, and equipment (asset class00.11). Information systems, such as computers and peripheralequipment (asset class 00.12). Data handling equipment except computers (asset class00.13). Airplanes (airframes and engines), except planes used incommercial or contract carrying of passengers or freight, and allhelicopters (airframes and engines) (asset class 00.21). Automobiles and taxis (asset class 00.22). Buses (asset class 00.23). Light general purpose trucks (asset class 00.241). Heavy general purpose trucks (asset class 00.242). Railroad cars and locomotives except those owned by railroadtransportation companies (asset class 00.25). Tractor units for use over the road (asset class00.26). Trailers and trailer-mounted containers (asset class00.27). Vessels, barges, tugs, and similar water-transportationequipment, except those used in marine construction (asset class00.28). Industrial steam and electric generation or distributionsystems (asset class 00.4). Product Classes.Product Classes include property listed in a 4-digit product class(except any ending in "9," a miscellaneous category) in DivisionD of the Standard Industrial Classification codes of the ExecutiveOffice of the President, Office of Management and Budget, IndustrialClassification Manual. Copies of the manual may be obtained from theNational Technical Information Service, an agency of the U.S.Department of Commerce. To order the manual, call 1-800-553-NTIS (1-800-553-6847). Orvisit their web site at www.ntis.gov. The cost of themanual is $30 and the order number is PB87-100012INQ. Examples.An exchange of a truck for a tractor is an exchange of like-kindproperty, and so is an exchange of timber land for crop acreage. Anexchange of a tractor for acreage, however, is not an exchange oflike-kind property. Neither is the exchange of livestock of one sexfor livestock of the other sex. An exchange of the assets of abusiness for the assets of a similar business cannot be treated as anexchange of one property for another property. Whether you engaged ina like-kind exchange depends on an analysis of each asset involved inthe exchange. Partially nontaxable exchange.If you exchange your property for like-kind property and alsoreceive money or unlike property, or both, in an exchange in which yourealize gain, you have a partially nontaxable exchange. You are taxedon the gain realized to the extent of the money and the fair marketvalue of the unlike property you receive. A loss is not deductible. Example 1.You trade farm land that cost you $30,000 for $10,000 cash andother land to be used in farming with a fair market value of $50,000.You have a gain of $30,000, but only $10,000, the cash received, isrecognized. Example 2.Assume the same facts as in Example 1, except that,instead of money, you received a tractor with a fair market value of$10,000. Your recognized gain is still limited to $10,000, the valueof the tractor (the unlike property). Example 3.Assume in Example 1 that the fair market value of the land youreceived was only $15,000. Your $5,000 loss is not deductible. Unlike property given up.If you trade property for like-kind property and also give upunlike property in the exchange, you have a recognized gain or loss onthe unlike property you give up. This gain or loss is the differencebetween the fair market value of the unlike property and its adjustedbasis. Like-kind exchanges between related persons.Special rules apply to like-kind exchanges made between relatedpersons. These rules affect both direct and indirect exchanges. Underthese rules, if either person disposes of the property within 2 yearsafter the exchange, the exchange is disqualified from nonrecognitiontreatment. The gain or loss on the original exchange must berecognized as of the date of that later disposition. The 2-yearholding period begins on the date of the last transfer of propertythat was part of the like-kind exchange. Related persons.Under these rules, a related person generally includes: a member ofyour family (spouse, brother, sister, parent, child, etc.), acorporation in which you have more than 50% ownership, a partnershipin which you directly or indirectly own more than a 50% interest ofthe capital or profits, and two partnerships in which you directly orindirectly own more than 50% of the capital interests or profits. For the list of related persons, see Nondeductible Lossunder Sales and Exchanges Between Related Persons inchapter 2 of Publication 544. Example.You used a truck in your farming business. Your sister used astation wagon in her landscaping business. In December 1997, youexchanged your truck, plus $200, for your sister's station wagon. Atthat time, the fair market value (FMV) of your truck was $7,000 andits adjusted basis was $6,000. The FMV of your sister's station wagonwas $7,200 and its adjusted basis was $1,000. You realized a gain of$1,000 (the $7,200 FMV of the station wagon minus the $200 you paid,minus the $6,000 adjusted basis of the truck). Your sister realized again of $6,200 (the $7,000 FMV of your truck plus the $200 you paid,minus the $1,000 adjusted basis of the station wagon). However, because this was a like-kind exchange, you recognized nogain. Your basis in the station wagon was $6,200 (the $6,000 adjustedbasis of the truck plus the $200 you paid). Your sister recognizedgain only to the extent of the money she received, $200. Her basis inthe truck was $1,000 (the $1,000 adjusted basis of the station wagonminus the $200 received, plus the $200 gain recognized). In 1999, you sold the station wagon to a third party for $7,000.Because you sold it within 2 years after the exchange, the exchange isdisqualified from nonrecognition treatment. On your tax return for1999, you must report your $1,000 gain on the exchange in 1998. Youalso report a loss on the sale of $200 (the adjusted basis of thestation wagon, $7,200 (its $6,200 basis plus the $1,000 gainrecognized), minus the $7,000 amount realized from the sale). In addition, your sister must report on her tax return for 1999 the$6,000 balance of her gain on the 1998 exchange. Her adjusted basis inthe truck is increased to $7,000 (its $1,000 basis plus the $6,000gain recognized). Exceptions to the rules for related persons.The following kinds of property dispositions are excluded fromthese rules. Table 10-1 Dispositions due to the death of either relatedperson. Involuntary conversions. Dispositions if it is established to the satisfaction of theIRS that neither the exchange nor the disposition has as a mainpurpose the avoidance of federal income tax. Exchanges of multiple properties.hotel a TallinnUnder the like-kind exchange rules, you must generally make aproperty-by-property comparison to figure your recognized gain and thebasis of the property you receive in the exchange. However, forexchanges of multiple properties, you do not make aproperty-by-property comparison if you do either of the following. Transfer and receive properties in two or more exchangegroups. Transfer or receive more than one property within a singleexchange group. For more information, see Multiple Property Exchanges inchapter 1 of Publication 544. Deferred exchanges.A deferred exchange is one in which you transfer property you usein business or hold for investment and, at a later time, you receivelike-kind property you will use in business or hold for investment.The property you receive is replacement property. The transaction mustbe an exchange (that is, property for property) rather than a transferof property for money that is used to buy replacement property. A deferred exchange for like-kind property may qualify fornonrecognition of gain or loss if the like-kind property is identifiedand transferred within the following time limits. You must identify the property to be received within 45 daysafter the date you transfer the property given up in theexchange. The property must be received by the earlier of thefollowing dates. The 180th day after the date on which you transfer theproperty given up in the exchange. The due date, including extensions, for your tax return forthe tax year in which the transfer of the property given upoccurs. For more information, see Deferred Exchanges in chapter 1 of Publication 544. Transfers Between Spouses No gain or loss is recognized (included in gross income) on atransfer of property from an individual to (or in trust for thebenefit of) a spouse, or a former spouse if incident to divorce. Thisrule does not apply if the recipient is a nonresident alien. Nor doesthis rule apply to a transfer in trust to the extent the liabilitiesassumed and the liabilities on the property are more than theproperty's adjusted basis. Any transfer of property to a spouse or former spouse on which gainor loss is not recognized is not considered a sale or exchange. Therecipient's basis in the property will be the same as the adjustedbasis of the giver immediately before the transfer. This carryoverbasis rule applies whether the adjusted basis of the transferredproperty is less than, equal to, or greater than either its fairmarket value at the time of transfer or any consideration paid by therecipient. This rule applies for determining loss as well as gain. Anygain recognized on a transfer in trust increases the basis. For more information on transfers of property incident to divorce,see Property Settlements in Publication 504. Foreclosuresand Repossessions If you do not make payments you owe on a loan secured by property,the lender may foreclose on the loan or repossess the property. Theforeclosure or repossession is treated as a sale or exchange fromwhich you may realize gain or loss. This is true even if youvoluntarily return the property to the lender. You may also realizeordinary income from cancellation of debt if the loan balance is morethan the property's fair market value. Buyer's (borrower's) gain or loss.You figure and report gain or loss from a foreclosure orrepossession in the same way as gain or loss from a sale or exchange.The gain or loss is the difference between your adjusted basis in thetransferred property and the amount realized. See DeterminingGain or Loss, earlier. TaxTip: You can use Table 10-1 to figure your gain or lossfrom a foreclosure or repossession. Amount realized on a nonrecourse debt.If you are not personally liable for repaying the debt (nonrecoursedebt) secured by the transferred property, the amount you realizeincludes the full amount of the debt canceled by the transfer. Thefull amount of the canceled debt is included even if the property'sfair market value is less than the canceled debt. Example 1.Ann paid $200,000 for farm land. She paid $15,000 down and borrowedthe remaining $185,000 from a bank. Ann is not personally liable forthe loan (nonrecourse debt), but pledges the land as security. Thebank foreclosed on the loan when Ann stopped making payments. At thetime of the foreclosure, the balance due on the loan was $180,000 andthe fair market value of the land was $170,000. The amount Annrealized on the foreclosure was $180,000, the debt canceled by theforeclosure. She figures her gain or loss by comparing the amountrealized ($180,000) with her adjusted basis ($200,000). She has a$20,000 deductible loss. Example 2.Assume the same facts as in Example 1 except the fairmarket value of the land was $210,000. The result is the same. Theamount Ann realized on the foreclosure is $180,000, the debt canceledby the foreclosure. Because her adjusted basis is $200,000, she has adeductible loss of $20,000. Amount realized on a recourse debt.If you are personally liable for repaying the debt (recourse debt),the amount realized on the foreclosure or repossession does notinclude the amount of the canceled debt that is income fromcancellation of debt. However, if the fair market value of thetransferred property is less than the canceled debt, the amountrealized includes the canceled debt up to the fair market value of theproperty. You are treated as receiving ordinary income from thecanceled debt for the part of the debt that is more than the fairmarket value. See Cancellation of debt, later. Example 3.Assume the same facts as in Example 1 earlier exceptthat Ann is personally liable for the loan (recourse debt). In thiscase, the amount she realizes is $170,000. This is the amount of thecanceled debt ($180,000) up to the farm land's fair market value($170,000). Ann figures her gain or loss on the foreclosure bycomparing the amount realized ($170,000) with her adjusted basis($200,000). She has a $30,000 deductible loss. She is also treated asreceiving ordinary income from cancellation of debt. That income is$10,000 ($180,000 - $170,000). This is the part of the canceleddebt not included in the amount realized. Example 4.Assume the same facts as in Example 2 earlier exceptthat Ann is personally liable for the loan (recourse debt). Sherealizes $180,000, the amount of the canceled debt ($180,000) up tothe fair market value of the land ($210,000). She compares the amountrealized ($180,000) with her adjusted basis ($200,000) and figures a$20,000 deductible loss. She has no ordinary income from cancellationof debt because all the canceled debt was included in the amountrealized. Seller's (lender's) gain or loss on repossession.If you finance a buyer's purchase of property and later acquire aninterest in it through foreclosure or repossession, you may have again or loss on the acquisition. For more information, seeRepossession in Publication 537. Cancellation of debt.If property that is repossessed or foreclosed upon secures a debtfor which you are personally liable (recourse debt), you generallymust report, as ordinary income, the amount by which the canceled debtis more than the fair market value of the property. This income isseparate from any gain or loss realized from the foreclosure orrepossession. Report the income from cancellation of a business debton Schedule F, line 10. Report the income from cancellation of anonbusiness debt as miscellaneous income on line 21, Form 1040. TaxTip: You can use Table 10-1 to figure your income fromcancellation of debt. However, income from cancellation of debt is not taxed if any ofthe following apply. The cancellation is intended as a gift. The debt is qualified farm debt (see chapter 4). The debt is qualified real property business debt (seechapter 5 of Publication 334,Tax Guide for SmallBusiness). You are insolvent or bankrupt (see Publication 908,Bankruptcy Tax Guide). Forms 1099-A and 1099-C.A lender who acquires an interest in your property in a foreclosureor repossession should send you Form 1099-A showing informationyou need to figure your gain or loss. However, if the lender alsocancels part of your debt and must file Form 1099-C, the lendermay include the information about the foreclosure or repossession onthat form instead of on Form 1099-A. The lender must file Form1099-C and send you a copy if the amount of debt canceled is$600 or more and the lender is a financial institution, credit union,or federal government agency. For foreclosures or repossessionsoccurring in 1999, these forms should be sent to you by January 31,2000.