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Video instructions and help with filling out and completing 2021 form 8824 instructions
Welcome my name is Michael Cates I'm the senior director of certification programs here at the college for financial planning and I'd like to talk with you a little bit about the light kind exchange calculation also known as the section 1031 calculation you may recall from another professor insights video where we discussed the rules regarding the calculation now I thought I would like to walk you through an actual calculation remember when we look at a light kind exchange calculation that there are three things that we have to compute we have to compute the realized gain what I look at as what really happened in the transaction we have to compute the recognized gain a term of art meaning how much is subject to income tax and we have to compute the substitute basis in other words the basis in our newly acquired asset so let's go over to a sample review question and see how this calculation actually works here we have a review question that we can use to walk through the calculation of the light kind exchange one of the hardest things that I've found in dealing with the light kind exchange calculation is that there are numbers flying around all over the place and to simplify or to make our lives a little bit easier the first thing I'm going to do is I'm going to come down and look at what is the question asking and here we see that the question is asking what is Dave's substitute basis in the acquired property so in this transaction let's put ourselves in Dave's shoes so we can kind of pull out the information that we need and we can discard the rest here we have Dave Beeman that's us we own equipment that has an adjusted basis of 10,000 dollars and a fair market value of 75,000 dollars through an exchange we're going to acquire new equipment from Rachel that has a fair market value of 60,000 and an adjusted basis of 35,000 quite frankly we don't care what Rachel's adjusted basis is in the exchange Dave that's us will receive $15,000 in cash from Rachel that we do care about okay so when we look at the actual calculation let's go back to my cheat sheet here if you will first of all we're going to compute the realized gain what really happened in the transaction so we're going to first of all look at what type of property did we receive well from Rachel we received some equipment that has a fair market value of $60,000 remember we're always going to receive fair market value how do I remember that if I want this property I should know what its fair market value is so we're getting equipment worth $60,000 and we're also receiving $15,000 in cash most of you are going to remember that that cash is non-qualifying property received in the light kind exchange in other words it.