|Property Swap Good for Everyone
Farmer Frank owns 350 acres of timberland near a college campus. The land is worth $100,000 and Frank has a basis of $40,000. The college recently received a bequest of farmland it would like to sell – and which Frank would like to buy. The farmland has been appraised at $80,000.
Frank proposes a swap of the properties, to which the college readily agrees. Since Frank gives up property worth more than the property he receives, he will be deemed to have made a charitable contribution (in the amount of $20,000). He will also be deemed to have made a bargain sale and, were it not for the “like-kind” exchange provisions of IRC §1031, Frank would realize gain in the amount of $80,000 (the amount realized by him) less his basis, as adjusted under the bargain sale rules. Frank’s basis, as adjusted, is equal to $40,000 (his cost basis in the timberland) x [$80,000/$100,000], or $32,000.
The like-kind exchange provisions of IRC §1031 generally provide that no gain is recognized upon the exchange of one kind of property for property of a like kind (certain exchanges are excepted, but exchanges of land for land or machine for machine usually come within the nonrecognition rule). In the situation at hand, the like-kind exchange provisions apply, and no gain is realized on the bargain sale. As discussed above, Frank’s basis in the acquired farmland will be $32,000 (his adjusted basis for determining gain on the bargain sale) [Rev. Rul. 78-163, 1978-1C.B. 257].
This kind of transaction can have obvious benefits for both individuals and charities wanting to trade parcels of real estate. For more on bargain sales, see the discussion beginning on page 2-83 of the Charitable Giving Tax Service.
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