Can the gain on the receipt of a truck be deferred in a like-kind exchange of rental property?
Question of the week: Can the gain on the receipt of a truck be deferred in a like-kind exchange of rental property?
Q. Can the gain on a truck received in a like-kind exchange of rental property be deferred as well?
A client completed a like-kind exchange of one rental property for another through an intermediary. Both are classified as residential rental units. The property exchanged is a four-plex with a fair market value (FMV) of $720,000 and a basis of $500,000. She exchanged it for a new duplex in another city (where she plans to move) with an FMV of $675,000. She agreed to take $15,000 in cash and a late model pick-up valued at $30,000. We know that the cash is taxable boot, but what about the truck? Since she isn’t trading one truck for another, can its value be added to the value of the house so the gain can be deferred too?
A. The receipt of the truck in the like-kind exchange is treated as taxable boot.
Your client must recognize gain on the receipt of the pick-up truck because it is taxable boot received rather than like-kind property.
Had your client sold the four-plex outright for $720,000 cash, she would have realized a gain of $220,000 ($720,000 - $500,000 basis) which she would have recognized immediately. Instead, she traded the four-plex for other real property, cash, and the truck. Her realized gain on the exchange is also $220,000 because she received property and cash for a total value of $720,000 ($675,000 duplex + $15,000 cash + $30,000 truck).
The two residential rental units are like-kind property so she can defer $175,000 ($675,000 - $500,000) of the gain. The remaining $45,000 gain consisting of cash and the truck must be recognized immediately. Note that the tax treatment of this transaction would be the same before or after the Tax Cuts and Jobs Act (TCJA). One type of real property may be exchanged for virtually any other type of real property in the U.S. if they are held for business or investment use, but personal property is not like-kind property, even if received as part of the exchange.
See Ancillary personal property and like-kind exchanges for more information.