Problem: Brown Construction, Inc. is in the road construction business. Brown exchanges a grader used in its business and $45,000 in cash for a scraper to be used in its business. The adjusted basis of the grader is $50,000, and the fair market value of the scraper is $102,000. What are the tax consequences to Brown of the exchange?
Tax Issues: There are a few tax issues to consider in this case. The first tax issue to consider is whether this exchange qualifies as a like-kind exchange, and if so, how does the IRS apply the recognition of gains or losses from these exchanges. Another tax issue that needs to be addressed is applying the appropriate rules when exchanging property when there is also cash involved in the exchange. Additionally, the determination of the adjusted basis of the property received must be completed.
The section of the IRS code that addresses the issue of exchanges of property is section 1031. Section 1031 allows tax payers to defer gains and losses from exchanges of like kind property. The tax code specifies which type of property can be tax exempt and the stipulations for qualification to be like kind property, "No gain or loss shall be recognized on the exchange of property held for productive use in the trade or business for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment." The IRS Code, Section 1031 does provide examples of property that does not qualify under Section 1031 and is not allowed to take the tax deferral as a like kind exchange; "Exception. This subsection shall not apply to any exchange of (A) stock in trade or other ...