Page 123 - Virtual Currencies

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Example 2. The trustee of a trust created of the insurance payment ($9,000) used to buy 1. The gain that must be reported under the
by a will transfers depreciable property to a the nondepreciable property (the stock) must rules for involuntary conversions, $1,000
beneficiary in satisfaction of a specific bequest also be included in figuring the gain from depre- ($116,000 − $115,000) plus the fair market
of $10,000. If the property had a value of $9,000 ciation. value of stock bought as qualified replace-
at the date used for estate tax valuation purpo- The amount you must report as ordinary in- ment property, $5,000, for a total of
ses, the $1,000 increase in value to the date of come on the transaction is $12,000, figured as $6,000.
distribution is a gain realized by the trust. Ordi- follows. 2. The gain you would have had to report as
nary income from depreciation must be repor- ordinary income from additional deprecia-
ted by the trust on the transfer. 1) Gain realized on the transaction ($92,640) tion ($20,000) had this transaction been a
limited to depreciation ($91,640) . . . . . . $91,640 cash sale minus the cost of the deprecia-
Like-Kind Exchanges ble real property bought ($15,000), or
and Involuntary 2) Gain includible in income . . . . . . 3,000 $5,000.
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(amount not spent) .
.
Conversions The ordinary income not reported, $14,000
Plus: Fair market value of ($20,000 − $6,000), is carried over to the depre-
A like-kind exchange of your depreciable prop- property other than depreciable ciable real property you bought as additional
erty or an involuntary conversion of the property personal property (the . . . . . . . . 9,000 12,000 depreciation.
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stock) .
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into similar or related property will not result in
your having to report ordinary income from de- Amount reportable as ordinary income Basis of property acquired. If the ordi-
preciation unless money or property other than (lesser of (1) or (2)). . . . . . . . . . . . . $12,000 nary income you have to report because of ad-
like-kind, similar, or related property is also re- ditional depreciation is limited, the total basis of
ceived in the transaction. If, instead of buying $9,000 in stock, you the property you acquired is its fair market value
(its cost, if bought to replace property involun-
The nonrecognition rules for like-kind bought $9,000 worth of depreciable personal tarily converted into money) minus the gain
property similar or related in use to the de-
! exchanges only apply to exchanges of stroyed property, you would only report $3,000 postponed.
CAUTION real property held for investment or for as ordinary income. If you acquired more than one item of prop-
productive use in your trade or business and erty, allocate the total basis among the proper-
not held primarily for sale. Depreciable real property. If you have a gain ties in proportion to their fair market value (their
from either a like-kind exchange or involuntary cost, in an involuntary conversion into money).
For more information on like-kind ex- conversion of your depreciable real property, However, if you acquired both depreciable real
changes and involuntary conversions, see ordinary income from additional depreciation is property and other property, allocate the total
chapter 1. figured under the rules explained earlier (see basis as follows.
Section 1250 Property), limited to the greater of
Depreciable personal property. If you have a the following amounts. 1. Subtract the ordinary income because of
gain from an involuntary conversion of your de- • The gain that must be reported under the additional depreciation that you do not
preciable personal property, the amount to be rules for like-kind exchanges or involuntary have to report from the fair market value
reported as ordinary income from depreciation conversions plus the fair market value of (or cost) of the depreciable real property
is the amount figured under the rules explained stock bought as replacement property in acquired.
earlier (see Section 1245 Property), limited to acquiring control of a corporation. 2. Add the fair market value (or cost) of the
the sum of the following amounts. • The gain you would have had to report as other property acquired to the result in (1).
• The gain that must be included in income ordinary income from additional deprecia-
under the rules for involuntary conversions. tion had the transaction been a cash sale 3. Divide the result in (1) by the result in (2).
• The fair market value of the replacement minus the cost (or fair market value in an 4. Multiply the total basis by the result in (3).
property other than depreciable personal exchange) of the depreciable real property This is the basis of the depreciable real
property acquired in the transaction. acquired. property acquired. If you acquired more
Example 1. You bought office machinery The ordinary income not reported for the than one item of depreciable real property,
allocate this basis amount among the
for $1,500 two years ago and deducted $780 year of the disposition is carried over to the de- properties in proportion to their fair market
depreciation. This year a fire destroyed the ma- preciable real property acquired in the like-kind value (or cost).
chinery and you received $1,200 from your fire exchange or involuntary conversion as addi-
insurance, realizing a gain of $480 ($1,200 − tional depreciation from the property disposed 5. Subtract the result in (4) from the total ba-
$720 adjusted basis). You choose to postpone of. Further, to figure the applicable percentage sis. This is the basis of the other property
reporting gain, but replacement machinery cost of additional depreciation to be treated as ordi- acquired. If you acquired more than one
you only $1,000. Your taxable gain under the nary income, the holding period starts over for item of other property, allocate this basis
rules for involuntary conversions is limited to the the new property. amount among the properties in propor-
remaining $200 insurance payment. All your re- tion to their fair market value (or cost).
placement property is depreciable personal Example. The state paid you $116,000
property, so your ordinary income from depreci- when it condemned your depreciable real prop- Example 1. In 1997, low-income housing
ation is limited to $200. erty for public use. You bought other real prop- property that you acquired and placed in serv-
erty similar in use to the property condemned ice in 1992 was destroyed by fire and you re-
Example 2. A fire destroyed office machi- for $110,000 ($15,000 for depreciable real ceived a $90,000 insurance payment. The
nery you bought for $116,000. The depreciation property and $95,000 for land). You also bought property's adjusted basis was $38,400, with ad-
deductions were $91,640 and the machinery stock for $5,000 to get control of a corporation ditional depreciation of $14,932. On December
had an adjusted basis of $24,360. You received owning property similar in use to the property 1, 1997, you used the insurance payment to ac-
a $117,000 insurance payment, realizing a gain condemned. You choose to postpone reporting quire and place in service replacement low-in-
of $92,640. the gain. If the transaction had been a sale for come housing property.
You immediately spent $105,000 of the in- cash only, under the rules described earlier, Your realized gain from the involuntary con-
surance payment for replacement machinery $20,000 would have been reportable as ordi- version was $51,600 ($90,000 − $38,400). You
and $9,000 for stock that qualifies as replace- nary income because of additional deprecia- chose to postpone reporting the gain under the
ment property, and you choose to postpone re- tion. involuntary conversion rules. Under the rules for
porting the gain. $114,000 of the $117,000 in- The ordinary income to be reported is depreciation recapture on real property, the or-
surance payment was used to buy replacement $6,000, which is the greater of the following dinary gain was $14,932, but you did not have
property, so the gain that must be included in amounts. to report any of it because of the limit for invol-
income under the rules for involuntary conver- untary conversions.
sions is the part not spent, or $3,000. The part
Page 32 Chapter 3 Ordinary or Capital Gain or Loss for Business Property