492 MODULE 34 TAXES: TRANSACTIONS IN PROPERTY

e. The basis of stock received as a dividend depends upon whether it was included in income
when
received.

(1) If included in income, basis is its FMV at date of distribution.

(2) If nontaxable when received, the basis of shareholder's original stock is allocated between
the dividend stock and the original stock in proportion to their relative FMV s. The holding
period of the dividend stock includes the holding period of the original stock.
EXAMPLE: Towns 100 shares of XYZ Corp. common stock that was acquired in 2005 for $12,000. 1n

Preferred =

2009, T received a nontaxable distribution of 10 XYZ Corp. preferred shares. At date of distribution the
FMV of the 100 common shares was $15,000, and the FMV of the 10 preferred shares was $5,000. The por-
tion ,afthe $12,000 basis allocated to the preferred and common shares would be

$ 5,000
-$7:2"'-=-0,::'::00""0- ($12,000) = $3,000

f
.
 _$:;;;1c::c5,c.;;00;,:;0:-- ($12,000) = $9,000
$20,000

The basis of stock rights depends upon whether they were included in income when receiv:ed.
(1) If rights were nontaxable and allowed to expire, they are deemed to have no basis and no loss
can be deducted.

(2) If rights were nontaxable and exercised or sold

(a) Basis is zero if FMV of rights is less than 15% of FMV of stock, unless taxpayer elects to
allocate basis

(b) If FMV of rights at date of receipt is at least 15% of FMV of stock, or if taxpayer elects,
basis is

Common =

FMV of rights x (Basis in stock)

FMV of rights + FMV stock
(3) If rights were taxable and included in income, basis is their FMV'at date of distribution.
g. Detailed rules for basis are included in following discussions of exchanges and involuntary con-
versions.

2. In a sale, the gain or loss is generally the difference between

a. The cash or fair market valuereceived, and the adjusted basis of the property sold
b. If the property sold is mortgaged (or encumbered by any other debt) and the buyer assumes or
takes the property subject to the debt
. (1) Include the amount of the debt in the amount realized because the seller is relieved of the ob-
ligation
EXAMPLE: Property with a $10,000 mortgage, and a basis of $15,000, is soldfor $10,000 cash and buyer
assumes the mortgage. The amount realized is $20,000, and the gain is $5,000.

(2) If the amount of the mortgage exceeds basis, use the same rules.
EXAMPLE: Property with a $15,000 mortgage, and a basis of $10,000, is given away subject to the mort-
gage. The amount realized is $15,000, and the gain is $5,000.

c. Casual sellers of property (as opposed to dealers) reduce selling price by any selling expenses.
3. In a taxable exchange, the gain or loss is the difference between the adjusted basis of the property
ex-
changed and theFMV of the property received. The basis of property received in taxable exchange a
is its FMV.

4. Nontaxable exchanges generally are not taxed in the current period. Questions concerning
nontax-
able exchanges often require a determination of the basis of property received, and the effect of boot
on the recognition of gain.

a. Like-kind exchange-an exchange of business or investment property for property of a like-kind

(1) Does not apply to property held for personal use, inventory, stocks, bonds, notes, intangible
evidences of ownership, and interests in a partnership

(2) Property held for business use may be exchanged for investment property or vice versa.
(3) Like-kind means "same class of property."