Property-disposition rules covering Section 1031 exchanges, Section 1033 involuntary conversions, and basis effects from boot.
This chapter covers the main nonrecognition and deferral rules in TCP property transactions. The key work is identifying when gain is deferred, when boot forces partial recognition, and how replacement-property basis must be tracked after the transaction.
Nontaxable disposition questions should be treated as deferral questions, not as no-gain questions. The exam often tests how much gain is recognized now, how much is deferred, and where the deferred gain is preserved in replacement-property basis.
| Deferral rule | First question | Exam risk |
|---|---|---|
| Section 1031 exchanges | Does the exchange involve qualifying real property and satisfy timing and intermediary rules? | Applying old personal-property like-kind rules or ignoring identification deadlines. |
| Section 1033 conversions | Was the disposition involuntary, and was qualifying replacement property acquired in time? | Treating a voluntary sale as an involuntary conversion. |
| Boot and partial recognition | Did the taxpayer receive cash, debt relief, or nonqualifying property? | Calling the whole transaction nontaxable when boot triggers recognized gain. |
| Replacement-property basis | Where is deferred gain preserved after the exchange or conversion? | Computing recognized gain correctly but losing the deferred gain in basis. |
| Step | What to do | Why it matters on TCP |
|---|---|---|
| 1. Confirm the deferral rule | Decide whether the transaction fits Section 1031, Section 1033, or another nonrecognition provision. | The requirements for voluntary exchanges and involuntary conversions are different. |
| 2. Compute realized gain or loss | Compare amount realized and adjusted basis before applying deferral. | Nonrecognition affects recognition timing; it does not eliminate the realized transaction. |
| 3. Identify boot or shortfall | Look for cash, debt relief, nonqualifying property, insufficient replacement cost, or other consideration. | Boot or under-reinvestment can trigger current gain even when the main rule applies. |
| 4. Determine recognized and deferred gain | Recognize only the required portion and preserve the rest through basis. | TCP often tests partial recognition rather than all-or-nothing taxability. |
| 5. Compute replacement basis | Adjust the replacement property basis for deferred gain, boot, and additional investment. | Basis carries the deferred gain forward into the next disposition. |
| Checkpoint | Exam use | What to avoid |
|---|---|---|
| Qualifying trigger | Decide whether the transaction is a voluntary exchange, involuntary conversion, sale, condemnation, casualty, or mixed event. | Applying nonrecognition treatment because replacement property was purchased later. |
| Property eligibility | Confirm that the property type and use satisfy the rule being claimed. | Applying like-kind exchange treatment outside qualifying real property. |
| Timing requirement | Check identification, exchange, replacement, and statutory reinvestment periods. | Computing deferral before proving the taxpayer met the deadlines. |
| Boot or shortfall | Identify cash, debt relief, nonqualifying property, or insufficient reinvestment. | Calling the transaction fully nontaxable when current gain is required. |
| Basis carryforward | Preserve deferred gain in replacement-property basis after recognized gain is determined. | Treating deferred gain as forgiven rather than postponed. |