If you give up unlike property in what would otherwise be a nontaxable, like-kind exchange, you have to recognize gain or loss on the unlike property. The gain or loss that you would recognize, and report on your tax return, would be the difference between the fair market value of the unlike property and its adjusted basis. For example:
You exchange real estate you are holding for investment for other real estate. The fair market value of the real estate you are receiving is $40,000 and the real estate you are giving up cost you $35,000 and presently has a fair market value of $38,000. In addition, you are giving 100 shares of stock A that cost you $15 a share and have a present market value of $20 a share.
· You would have a realized gain of $5,000 on the real estate ($40,000 fair market value of the property you are receiving minus $35,000 basis in the property you are giving up). None of this gain would be taxable because the exchange qualifies as a nontaxable like-kind exchange.
· You would have to recognize a gain of $500 for tax purposes for the difference between the fair market value of the stock ($20 a share times 100 shares = $2,000), and the basis of the stock ($15 a share times 100 shares = $1,500), since the stock is unlike property in the exchange.
Basis of Property Received in a Partially Taxable Exchange
When you receive different properties in a partially taxable exchange, you must first determine the total basis to be assigned to the properties received. This is the total adjusted basis of the properties you give up plus any additional costs you incur on the exchange and any gain you recognize for tax purposes on the exchange, minus any money you receive and any loss you recognize on the exchange.
Once you determine the total basis of the property you receive, you allocate it first to the unlike property based on its fair market value, and the rest is allocated to the like-kind property received.