4.1 Section 1031 Exchanges & Flow-Through Entity Basis
Calculate boot-triggered taxable gains in Sec 1031 real estate exchanges and contrast partnership debt basis with S-corp shareholder debt basis.
Key Blueprint Takeaways
- In Sec 1031 exchanges, recognized gain is the LESSER of realized gain or boot received.
- Partnership outside basis includes partnership bank debt; S-corp basis excludes bank debt.
- Corporate tax-free Sec 351 formation requires contributing shareholders to hold 80% control immediately after transfer.
Federal taxation on the CPA exam emphasizes basis calculations and realization vs recognition events. Under Section 1031, real estate held for investment can be exchanged tax-free, but cash or debt relief received represents taxable 'boot'.
In pass-through entity taxation, understanding debt allocation is vital. Partners receive outside basis for their share of partnership liabilities under Section 752, allowing them to deduct larger partnership losses than S-corporation shareholders.
A real estate investor exchanges commercial rental real estate with an adjusted tax basis of $300,000 and fair market value of $500,000 for replacement commercial real estate with a fair market value of $440,000, plus $60,000 in cash boot. What is the investor's realized gain, recognized gain, and new adjusted tax basis in the replacement real estate under IRC Section 1031?