Publication 550 |
2000 Tax Year |
Nontaxable Trades
This section discusses trades that generally do not result in a
taxable gain or a deductible loss. For more information on nontaxable
trades, see chapter 1 of Publication 544.
Like-Kind Exchanges
If you trade business or
investment property for other business or investment property of a
like kind, you do not pay tax on any gain or deduct any loss until you
sell or dispose of the property you receive. To be nontaxable, a trade
must meet all six of the following conditions.
- The property must be business or investment property. You
must hold both the property you trade and the property you receive for
productive use in your trade or business or for investment. Neither
property may be property used for personal purposes, such as your home
or family car.
- The property must not be held primarily for sale. The
property you trade and the property you receive must not be property
you sell to customers, such as merchandise.
- The property must not be stocks, bonds, notes, choses in
action, certificates of trust or beneficial interest, or other
securities or evidences of indebtedness or interest, including
partnership interests. However, you can have a nontaxable trade of
corporate stocks under a different rule, as discussed later.
- There must be a trade of like property. The trade of real
estate for real estate, or personal property for similar personal
property, is a trade of like property. The trade of an apartment house
for a store building, or a panel truck for a pickup truck, is a trade
of like property. The trade of a piece of machinery for a store
building is not a trade of like property. Real property located in the
United States and real property located outside the United States are
not like property. Also, personal property used predominantly within
the United States and personal property used predominantly outside the
United States are not like property.
- The property to be received must be identified within 45
days after the date you transfer the property given up in the
trade.
- The property to be received must be received by the earlier
of:
- The 180th day after the date on which you transfer the
property given up in the trade, or
- The due date, including extensions, for your tax return for
the year in which the transfer of the property given up occurs.
If you trade property with a related party in a like-kind exchange,
a special rule may apply. See Related Party Transactions,
later in this chapter. Also, see chapter 1 of Publication 544
for more
information on exchanges of business property and special rules for
exchanges using qualified intermediaries or involving multiple
properties.
Partly nontaxable exchange.
If you receive cash or unlike property in addition to the like
property, and the preceding six conditions are met, you have a partly
nontaxable trade. You are taxed on any gain you realize, but only up
to the amount of the cash and the fair market value of the unlike
property you receive. You cannot deduct a loss.
Like property and unlike property transferred.
If you give up unlike property in addition to the like property,
you must recognize gain or loss on the unlike property you give up.
The gain or loss is the difference between the adjusted basis of the
unlike property and its fair market value.
Like property and money transferred.
If conditions (1) -- (6) are met, you have a nontaxable trade
even if you pay money in addition to the like property.
Basis of property received.
You figure your basis in property received in a nontaxable or
partly nontaxable trade as explained earlier under Basis Other
Than Cost, earlier.
How to report.
You must report the trade of like property on Form 8824.
If you figure a recognized gain or loss on Form 8824, report it
on Schedule D of Form 1040 or on Form 4797, Sales of
Business Property, whichever applies.
For information on using Form 4797, see chapter 4 of Publication 544.
Corporate Stocks
The following trades of corporate stocks generally do not result in
a taxable gain or a deductible loss.
Stock for stock of the same corporation.
You can exchange common stock for common stock or preferred stock
for preferred stock in the same corporation without having a
recognized gain or loss. This is true for a trade between two
stockholders as well as a trade between a stockholder and the
corporation.
Money or other property received.
If in an otherwise nontaxable trade you receive money or other
property in addition to stock, then your gain on the trade, if any, is
taxed, but only up to the amount of the money or other property. Any
loss is not recognized.
Nonqualified preferred stock.
Nonqualified preferred stock is generally treated as property other
than stock. Generally, this applies to preferred stock with one or
more of the following features.
- The holder has the right to require the issuer or a related
person to redeem or purchase the stock.
- The issuer or a related person is required to redeem or
purchase the stock.
- The issuer or a related person has the right to redeem the
stock, and on the issue date, it is more likely than not that the
right will be exercised.
- The dividend rate on the stock varies with reference to
interest rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock, see
section 351(g)(2) of the Internal Revenue Code.
Corporate reorganizations.
In some instances, you can trade common stock for preferred stock,
preferred stock for common stock, or stock in one corporation for
stock in another corporation without having a recognized gain or loss.
These trades must be part of mergers, recapitalizations, transfers to
controlled corporations, bankruptcies, corporate divisions, corporate
acquisitions, or other corporate reorganizations.
Convertible stocks and bonds.
You generally will not have a recognized gain or loss if you
convert bonds into stock or preferred stock into common stock of the
same corporation according to a conversion privilege in the terms of
the bond or the preferred stock certificate.
Example.
In November, you bought for $1 a right issued by XYZ Corporation
entitling you, on payment of $99, to subscribe to a bond issued by
that corporation.
On December 2, you subscribed to the bond, which was issued on
December 9. The bond contained a clause stating that you would receive
one share of XYZ Corporation common stock on surrender of one bond and
the payment of $50.
Later, you presented the bond and $50 and received one share of XYZ
Corporation common stock. You did not have a recognized gain or loss.
This is true whether the fair market value of the stock was more or
less than $150 on the date of the conversion.
The basis of your share of stock is $150 ($1 + $99 + $50). Your
holding period is split. Your holding period for the part based on
your ownership of the bond ($100 basis) begins on December 2. Your
holding period for the part based on your cash investment ($50 basis)
begins on the day after you acquired the share of stock.
Bonds for stock of another corporation.
Generally, if you convert the bonds of one corporation into common
stock of another corporation, according to the terms of the bond
issue, you must recognize gain or loss up to the difference between
the fair market value of the stock received and the adjusted basis of
the bonds exchanged. In some instances, however, such as trades that
are part of mergers or other corporate reorganizations, you will have
no recognized gain or loss if certain requirements are met. For more
information about the tax consequences of converting securities of one
corporation into common stock of another corporation, under
circumstances such as those just described, consult the respective
corporations and the terms of the bond issue. This information is also
available on the prospectus of the bond issue.
Property for stock of a controlled corporation.
If you transfer property to a corporation solely in exchange for
stock in that corporation, and immediately after the trade you are in
control of the corporation, you ordinarily will not recognize a gain
or loss. This rule applies both to individuals and to groups who
transfer property to a corporation. It does not apply if the
corporation is an investment company.
If you are in a bankruptcy or a similar proceeding and you transfer
property to a controlled corporation under a plan, other than a
reorganization, you must recognize gain to the extent the stock you
receive in the exchange is used to pay off your debts.
For this purpose, to be in control of a corporation, you or your
group of transferors must own, immediately after the exchange, at
least 80% of the total combined voting power of all classes of stock
entitled to vote and at least 80% of the outstanding shares of each
class of nonvoting stock of the corporation.
If this provision applies to you, you must attach to your return a
complete statement of all facts pertinent to the exchange.
Money or other property received.
If, in an otherwise nontaxable trade of property for corporate
stock, you also receive money or property other than stock, you may
have a taxable gain. However, you are taxed only up to the amount of
money plus the fair market value of the other property you receive.
The rules for figuring taxable gain in this situation generally follow
those for a partially nontaxable exchange discussed earlier under
Like-Kind Exchanges. If the property you give up includes
depreciable property, the taxable gain may have to be reported as
ordinary income because of depreciation. (See chapter 3 of Publication 544.)
No loss is recognized.
Nonqualified preferred stock (described earlier under Stock
for stock of the same corporation) received is generally treated
as property other than stock.
Basis of stock or other property received.
The basis of the stock you receive is generally the adjusted basis
of the property you transfer. Increase this amount by any amount that
was treated as a dividend, plus any gain recognized on the trade.
Decrease this amount by any cash you received and the fair market
value of any other property you received.
The basis of any other property you receive is its fair market
value on the date of the trade.
Insurance Policies
and Annuities
You will not have a recognized gain or loss if you trade:
- A life insurance contract for another life insurance
contract or for an endowment or annuity contract,
- An endowment contract for an annuity contract or for another
endowment contract that provides for regular payments beginning at a
date not later than the beginning date under the old contract, or
- An annuity contract for another annuity contract.
The insured or annuitant must be the same under both contracts.
Exchanges of contracts not included in this list, such as an annuity
contract for an endowment contract, or an annuity or endowment
contract for a life insurance contract, are taxable.
U.S. Treasury
Notes or Bonds
You can trade certain issues of U.S. Treasury obligations for other
issues, designated by the Secretary of the Treasury, with no gain or
loss recognized on the trade.
See the discussion in chapter 1
under U.S. Treasury Bills,
Notes, and Bonds for information about income from these
investments.
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