Chapter § 55.6 BASIS OF REPLACEMENT PROPERTY

• Jurisdiction: Oregon

§ 55.6 BASIS OF REPLACEMENT PROPERTY

The basis of the replacement property is a carryover of the basis of the relinquished property. See Treas Reg § 1.1031(d)-1(a)-(b). The gain in a tax-free exchange is deferred only because the gain will ultimately be recognized when the exchanger sells the replacement property.

The basis of properties received is allocated to all replacement properties, whether or not the replacement property is of like kind, and is allocated first to the non-like-kind property, up to the fair market value of such property. Treas Reg § 1.1031(d)-1(c).

EXAMPLE: The exchanger exchanges real estate relinquished property with a fair market value of $12,500 and a basis of $10,000 for real estate replacement property with a fair market value of $9,000, an automobile worth $2,000, and $1,500 cash. The gain realized in the transaction is $2,500 ($12,500 fair market value of the relinquished property minus its basis of $10,000). The boot received is $3,500, composed of the $1,500 in cash and the $2,000 automobile. The gain recognized is $2,500, which is the lesser of

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