Chapter 13: Nontaxable Exchanges

01.Core Concepts

Direct Conversion • Occurs when converted property is replaced instead of purchased. • Nonrecognition treatment is mandatory. • Basis and holding period in replacement property same as converted property. • To avoid nonrecognition, fail the time period test. Indirect Conversion • Nonrecognition treatment is elective. • Gain recognized to extent amount realized (usually insurance proceeds) exceeds investment in replacement property. • Basis in replacement property is its cost, less deferred gain. • Holding period includes that of converted property.