Teresa calls you to discuss her latest tax planning ideas. At a cocktail party last night she was mesmerized by a discussion of like kind exchanges. She now feels that like kind exchanges will be the solution to all of her tax problems. She just "knows" she should do the following like kind exchanges this year:
· Exchange her highly appreciated stock in Apple Computer (FMV $500,000 basis $10,000) for shares of General Motors.
· Exchange vacant land in Montana for a shopping mall in Illinois
· Exchange 2005 model year business truck (FMV $15,000 basis $50,000) for a new 2007 model year business truck
· Exchange excess inventory for new computers for the business
· Exchange vacation home in Hawaii for a vacation home in New York
· Exchange residential rental property in Florida for residential rental property in Tahiti
· Exchange apartment building in Texas for a residential rental in Nantucket
Discuss whether each proposed exchange qualifies as a like kind exchange. Are there any exchanges that qualify that you would recommend that Teresa not do? Why? Explain the rules that must be followed to properly execute a like kind exchange. Explain to Teresa how to properly structure an exchange if the property she wants to dispose of is not desired by the owner of the property that she wants to acquire.
? Exchange her highly appreciated stock in Apple Computer (FMV $500,000 basis $10,000) for shares of General Motors. Exchange of marketable securities is specifically excluded from IRC Sec 1031. No like-kind exchange.
? Exchange vacant land in Montana for a shopping mall in Illinois. That will work because both are investment properties. Sec 1031 applies.
? Exchange 2005 model year business truck (FMV $15,000 basis $50,000) for a new 2007 model year business truck. These two vehicles are like-kind and can be exchanged; however, see below.
? Exchange excess inventory for new computers for the business. These are not like-kind assets (inventory and fixed assets); no tax free exchange allowed.
? Exchange vacation home in ...
The solution discusses each of the seven scenarios involving a like kind exchange. There is a full explanation of tax law as it applies in each situation including the why it won't work.