Gross Income

<p><i>Editor's Note</i>: The 2025 OBBB did not change the tax rules governing Social Security, discussed below. <i>See</i> <a href="https://www.thinkadvisor.com/tax-facts/2025/08/28/85224--what-is-the-temporary-senior-deduction-deduction-for-taxpayers-age-65-and-over/">Q 8522.4</a> for the new deduction for taxpayers aged 65 and up.</p><p> Under certain circumstances, a portion of Social Security benefits and tier 1 railroad retirement benefits may be taxable. If a taxpayer's modified adjusted gross income plus one-half of the Social Security benefits (including tier I railroad retirement benefits) received during the taxable year <em>exceeds</em> certain base amounts, then a portion of the benefits are includible in gross income as ordinary income. "Modified adjusted gross income" is a taxpayer's adjusted gross income (disregarding foreign income, savings bonds, adoption assistance program exclusions, the deductions for education loan interest and for qualified tuition and related expenses) <em>plus</em> any tax-exempt interest income received or accrued during the taxable year.<a href="#_ftn1">¹</a>A taxpayer whose modified adjusted gross income plus one-half of his or her Social Security benefits exceed a base amount is required to include in gross income the <em>lesser</em> of (a) 50 percent of the excess of such combined income over the base amount, <em>or</em> (b) 50 percent of the Social Security benefits received during the taxable year.<a href="#_ftn2">²</a> The "base amount" is $32,000 for married taxpayers filing jointly, $25,000 for unmarried taxpayers, and zero ($0) for married taxpayers filing separately who have not lived apart for the entire taxable year.<a href="#_ftn3">³</a></p><p> In addition to the initial tier of taxation discussed above, a percentage of Social Security benefits that exceed an adjusted base amount will be includable in a taxpayer's gross income. The "adjusted base amount" is $44,000 for married taxpayers filing jointly, $34,000 for unmarried taxpayers, and zero ($0) for married individuals filing separately who did not live apart for the entire taxable year.<a href="#_ftn4">⁴</a> If a taxpayer's modified adjusted gross income plus one-half of his or her Social Security benefits exceed the adjusted base amount, his or her gross income will include the <em>lesser</em> of (a) 85 percent of the Social Security benefits received during the year, <em>or</em> (b) the sum of – (i) 85 percent of the excess over the adjusted base amount, plus (ii) the smaller of – (A) the amount that is includable under the initial tier of taxation, or (B) $4,500 (single taxpayers) or $6,000 (married taxpayers filing jointly).<a href="#_ftn5">⁵</a><br/><blockquote><em>Example 1.</em> A married couple files a joint return. During the taxable year, they received $12,000 in Social Security benefits and had a modified adjusted gross income of $35,000 ($28,000 plus $7,000 of tax-exempt interest income). Their modified adjusted gross income plus one-half of their Social Security benefits [$35,000 + (½ of $12,000) = $41,000] is greater than the applicable <em>base amount</em> of $32,000 but less than the applicable <em>adjusted base amount</em> of $44,000; therefore, $4,500 [the lesser of one-half of their benefits ($6,000) or one-half of the excess of $41,000 over the base amount (½ × ($41,000 – $32,000), or $4,500)] is included in gross income. </blockquote><br/> An election is available that permits a taxpayer to treat a lump sum payment of benefits as received in the year to which the benefits are attributable.<a href="#_ftn6">⁶</a><br/><strong>Reductions of Social Security Benefits that do not Reduce the</strong><br/> <strong>Amount Included in the Computation of Taxable Benefits</strong></p><p> Workers' compensation pay that reduced the amount of Social Security received and any amounts withheld from a taxpayer's Social Security benefits to pay Medicare insurance premiums do not reduce the amount that are included in the computation of taxable Social Security benefits.<a href="#_ftn7">⁷</a></p><p> In <em>Green v. Comm</em>.,<a href="#_ftn8">⁸</a> the taxpayer argued that his Social Security disability benefits were excludable from gross income<a href="#_ftn9">⁹</a> because they had been paid in lieu of workers' compensation. Thus, they should not be included in the computation of taxable Social Security benefits. The Tax Court determined, however, that Title II of the Social Security Act is <em>not</em> a form of workers' compensation. Instead, the Act allows for disability payments to individuals regardless of employment. Consequently, the taxpayer's Social Security disability benefits were includable in gross income. </p><p> Similarly, in a case of first impression, the Tax Court held that a taxpayer's Social Security disability insurance benefits (payable as a result of the taxpayer's disability due to lung cancer caused from exposure to Agent Orange during his Vietnam combat service) were includable in gross income under IRC Section 86 and not excludable under IRC Section 104(a)(4). The court reasoned that Social Security disability insurance benefits do not take into consideration the nature or cause of the individual's disability. Eligibility for purposes of Social Security disability benefits is determined on the basis of the individual's prior work record, not the cause of the disability. Moreover, the amount of Social Security disability payments is computed under a formula that does not consider the nature or extent of the injury. Consequently, because the taxpayer's Social Security disability insurance benefits were not paid for personal injury or sickness in military service within the meaning of IRC Section 104(a)(4), the benefits were not excluded from gross income under IRC Section 104(a)(4).<a href="#_ftn10">¹⁰</a></p><p> Railroad retirement benefits (other than Tier I benefits) are taxed in the same way as benefits received under a qualified pension or profit sharing plan. For this purpose, the Tier II portion of the taxes imposed on employees and employee representatives is treated as an employee contribution, while the Tier II portion of the taxes imposed on employers is treated as an employer contribution.<a href="#_ftn11">¹¹</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 86(b)(2). </p><p> <a href="#_ftnref2">2</a>. IRC § 86(a)(1). </p><p> <a href="#_ftnref3">3</a>. IRC § 86(c)(1). In a Tax Court case, the term "live apart" means living in separate residences. In that case, the taxpayer lived in the same residence as his spouse for at least thirty days during the tax year in question (even though maintaining separate bedrooms). The Tax Court ruled that he did not "live apart" from his spouse at all times during the year; therefore, the taxpayer's base amount was zero. <em>McAdams v. Commissioner</em>, 118 TC 373 (2002). </p><p> <a href="#_ftnref4">4</a>. IRC § 86(c)(2). </p><p> <a href="#_ftnref5">5</a>. IRC § 86(a)(2). </p><p> <a href="#_ftnref6">6</a>. IRC § 86(e). </p><p> <a href="#_ftnref7">7</a>. Rev. Rul. 84-173, 1984-2 CB 16. </p><p> <a href="#_ftnref8">8</a>. TC Memo 2006-39. </p><p> <a href="#_ftnref9">9</a>. Under IRC § 104(a)(1). </p><p> <a href="#_ftnref10">10</a>. <em>Reimels v. Commissioner</em>, 123 TC 245 (2004), <em>aff'd</em>, 436 F.3d 344 (2d Cir. 2006); <em>Haar v. Commissioner</em>, 78 TC 864, 866 (1982), <em>aff'd</em>, 709 F.2d 1206 (8th Cir. 1983), followed. </p><p> <a href="#_ftnref11">11</a>. See IRC § 72(r)(1). </p>

<div class="Section1">For tax purposes, a &ldquo;capital asset&rdquo; is any property that, in the hands of the taxpayer, is not: (1) property (including inventory and stock in trade) held primarily for sale to customers; (2) real or depreciable property used in his trade or business; (3) copyrights and literary, musical, or artistic compositions (or similar properties) created by the taxpayer, or merely owned by him, if his tax basis in the property is determined (other than by reason of IRC Section 1022, which governs the basis determination of inherited property) by reference to the creator&rsquo;s tax basis; (4) letters, memoranda, and similar properties produced by or for the taxpayer, or merely owned by him, if his tax basis is determined by reference to the tax basis of such producer or recipient; (5) accounts or notes receivable acquired in his trade or business for services rendered or sales of property described in (1), above; (6) certain publications of the United States government; (7) any commodities derivative financial instrument held by a commodities derivatives dealer; (8) any hedging instrument that is clearly identified as such by the required time; and (9) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of his trade or business.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Generally, any property held as an investment is a capital asset, except that rental real estate is generally not a capital asset because it is treated as a trade or business asset (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7791">7791</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1221; Treas. Reg. &sect; 1.1221-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRS Pub. 544.<br /> <br /> </div></div><br />

<p> As a general rule, the income is taxable to the minor. However, in the case of <em>unearned</em> income (such as trust income) of most children under age nineteen (age 24, if the child is a full-time student), different rules may apply. </p><p> Prior to 2018 and after 2019, the unearned income taxable to the child generally is taxed at the parents' marginal rate when it exceeds $2,700 (in 2025-2026, $2,600 in 2024, $2,500 in 2023, $2,300 in 2022 and $2,200 in 2015 to 2021, as adjusted for inflation).<a href="#_ftn1">¹</a></p><p><hr></hr></p><p> <strong>Planning Point:</strong> Taxpayers had the option of applying a different set of rules in 2018 and 2019 under the 2017 tax reform legislation. If the election was made, earned income of minors would be taxed according to the individual income tax rates prescribed for single filers,<a href="#_ftn2">²</a> and unearned income of minors would be taxed according to the applicable tax bracket that would apply if the income was that of a trust or estate (for both income that is subject to ordinary income tax rates and in determining the capital gains rate that will apply if long-term capital gains treatment is appropriate).<a href="#_ftn3">³</a></p><p><hr></hr></p><p> To the extent that income from the transferred property is used for the minor's support, it may be taxed to the person who is legally obligated to support the minor.<a href="#_ftn4">⁴</a> State laws differ as to a parent's obligation to support. The income will be taxable to the parent only to the extent that it is actually used to discharge or satisfy the parent's obligation under state law.<a href="#_ftn5">⁵</a></p><p> The 2017 Tax Act aimed to simplify the treatment of unearned income of minors by applying the tax rates that apply to trusts and estates to this income. The SECURE Act<a href="#_ftn6">⁶</a> repealed this rule for tax years beginning in 2020 and thereafter. For 2018 and 2019, taxpayers had the option of electing which set of rules to apply, and may apply for refunds if appropriate for these tax years. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40. </p><p> <a href="#_ftnref2">2</a>. IRC § 1(j)(4)(B). </p><p> <a href="#_ftnref3">3</a>. IRC § 1(j)(4). </p><p> <a href="#_ftnref4">4</a>. Rev. Rul. 56-484, 1956-2 CB 23; Rev. Rul. 59-357, 1959-2 CB 212. </p><p> <a href="#_ftnref5">5</a>. IRC § 677(b). </p><p> <a href="#_ftnref6">6</a>. PL 116-94, 133 Stat. 2534 (12-20-2019) </p>

<div class="Section1">At one time, educational benefit trusts promised to provide funds to pay certain educational costs on a tax favored basis. Treasury Regulation Section 1.962-1 confirmed, however, that these benefits were taxed to employees when paid as compensation. Where employer contributions to an educational benefit trust are related to an employee&rsquo;s service, they are taxed as compensation to the employee when they are either paid to or for the benefit of their children or no longer are subject to a substantial risk of forfeiture.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Amounts paid to provide benefits to children of stockholder-employees generally are treated as compensation to the employees, not dividends, where the plan is adopted for business reasons in an effort to attract and retain employees.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Where a bona fide debtor-creditor relationship is not intended for funds advanced to employees for this purpose, the amounts are treated as compensation even though called &ldquo;loans.&rdquo;<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> IRC Sections 419 and 419A generally apply to post-1985 contributions to an educational benefit trust. Prior to that time, there was some controversy regarding the timing of the employer&rsquo;s deduction. For years, the position of the IRS was that benefits provided under an educational benefit trust related to the employee&rsquo;s service constituted a deferral of compensation and, therefore, the employer&rsquo;s deductions should be taken when the benefits are paid out under IRC Section 404(a)(5).<a href="#_ftn4" name="_ftnref4">⁴</a> The IRS has since privately ruled that an educational benefit trust was a &ldquo;welfare benefit fund,&rdquo; and that the deduction of contributions is controlled by IRC Section 419.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Educational benefit trusts cannot take advantage of the (limited) immediate deductions for advance funding under the general rule of IRC Section 419 because they do not have &ldquo;qualified asset accounts.&rdquo;<a href="#_ftn6" name="_ftnref6">⁶</a> Thus, an employer&rsquo;s deduction generally is limited to the amount includable in income by employees that year, minus the trust&rsquo;s after-tax income.<br /> <br /> The general rule of IRC Section 419(b), which limits the deduction of welfare benefit fund contributions to the fund&rsquo;s &ldquo;qualified cost,&rdquo; does not apply to contributions to a collectively bargained welfare benefit fund. The IRS has ruled that such contributions could be deducted in the year contributed, provided that they constitute ordinary and necessary expenses.<a href="#_ftn7" name="_ftnref7">⁷</a> This ruling is questionable, however, because it is based on a temporary regulation (published before the current statutory text) that provides more generous treatment for collectively bargained funds than current law.<br /> <br /> For a more detailed treatment of welfare benefit funds, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4101">4101</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4102">4102</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;<em>Grant-Jacoby, Inc. v. Commissioner</em>, 73 TC 700 (1980); <em>Citrus Orthopedic Medical Group, Inc. v. Commissioner</em>, 72 TC 461 (1979); <em>Armantrout v. Commissioner</em>, 67 TC 996 (1977), <em>aff&rsquo;d</em>, 570 F.2d 210 (7th Cir. 1978); Treas. Reg. &sect; 1.83-3(c)(4), Ex. 2; Rev. Rul. 75-448, 1975-2 CB 55; Let. Rul. 8535002. <em><em>See also</em> Wheeler v. U.S.</em>, 768 F.2d 1333 (Fed. Cir. 1985).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;<em>Grant-Jacoby, Inc. v. Commissioner</em>, supra.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;<em>Saunders v. Commissioner</em>, TC Memo 1982-655, <em>aff&rsquo;d</em>, 720 F.2d 871, 83-2 USTC &para;&nbsp;88,609 (5th Cir. 1983) (overly generous loan forgiveness provisions in plan indicated true loan not intended). <em><em>See</em> </em>Let. Rul. 8137001.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;<em>Grant-Jacoby, Inc. v. Commissioner</em>, supra; <em>Citrus Orthopedic Medical Group, Inc. v. Commissioner</em>, supra; Rev. Rul. 75-448, 1975-2 CB 55.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;Let. Rul. 8737022.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;IRC &sect; 419A(a).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;See Let. Rul. 9510048.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em> For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">¹</a> This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.<a href="#_ftn2" name="_ftnref2">²</a> The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> <em>Receipt of &ldquo;boot.&rdquo;</em> If the taxpayer receives only like-kind property in the exchange, no taxable gain or loss is reported on his income tax return as a result of the exchange regardless of his tax basis in and value of the respective properties.<a href="#_ftn4" name="_ftnref4">⁴</a> However, if in addition to like-kind property, the taxpayer receives cash or other property that is different in kind or class from the property he transferred (i.e., nonlike-kind property is often referred to as &ldquo;boot&rdquo;), any gain he realizes in the exchange will be taxable to the extent of the sum of the amount of cash and the fair market value of the nonlike-kind property received; any loss realized in such an exchange may <em>not</em> be taken into account in calculating the taxpayer&rsquo;s income tax.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If the taxpayer receives only like-kind property, but transfers cash or other nonlike-kind property as part of the exchange, regulations indicate that the nonrecognition rules apply to the like-kind properties, but not to the &ldquo;boot.&rdquo;<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <em>Recapture</em>. In a like-kind exchange where boot is given or received, the recapture provisions applicable to certain depreciable property apply (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="716">716</a>). If property for which an investment credit was taken is exchanged before the investment credit recapture period ends, a percentage will be recaptured (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7893">7893</a>).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1031(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 1031(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;IRC &sect; 1031(h).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;IRC &sect; 1031(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;IRC &sect;&sect; 1031(b), 1031(c); Treas. Reg. &sect; 1.1031(b)-1.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;Treas. Reg. &sect;&sect; 1.1031(a)-1(a)(2), 1.1031(d)-1(e). <em><em>See</em> Allegheny County Auto Mart</em>, 12 TCM (CCH) 427, <em>aff&rsquo;d per curiam</em>, 208 F.2d 693 (3d Cir. 1953); <em>W.H. Hartman Co. v. Commissioner</em>, 20 BTA 302 (1930).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;IRC &sect; 50(a)(1).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor's Note:</em> For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">¹</a> This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.<a href="#_ftn2" name="_ftnref2">²</a> The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="Section1"><br /> <br /> The tax basis of like-kind property received in a tax-free (or partially tax-free) like-kind exchange is generally equal to the adjusted tax basis of the like-kind property given. There are, however, two exceptions. First, if an individual transfers cash or nonlike-kind property or assumes a liability of the other party to the exchange (i.e., the transferee) that exceeds the liabilities (if any) assumed by the transferee, the individual's tax basis in the like-kind property received is equal to his adjusted tax basis in the property given <em>increased by</em> the <em>sum of</em> (1) the amount of cash and the fair market value of nonlike-kind property given and (2) the net liability assumed.<br /> <br /> Second, if liabilities assumed by the transferee exceed the liabilities (if any) assumed by the individual (transferor) and no other cash or boot is transferred by the individual, the individual's tax basis in the like-kind property he receives is equal to his adjusted tax basis in the like-kind property given <em>decreased by</em> the net amount of liabilities assumed by the transferee.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The tax basis of any nonlike-kind property received in a like-kind exchange is the fair market value of the nonlike-kind property on the date of the exchange.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1031(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1031(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1031(h).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 1031(d), Treas. Reg. § 1.1031(d)-2.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. Treas. Reg. § 1.1031(d)-1(c).<br /> <br /> </div>

<div class="Section1"><em>Editor's Note:</em> For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">¹</a> This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.<a href="#_ftn2" name="_ftnref2">²</a> The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="Section1"><br /> <br /> If, in an exchange, one party assumes a liability of the other party or receives property subject to a liability, he will be deemed to have transferred "boot" in an amount equal to the liability. The party who transfers the property subject to the liability or whose liability is assumed will be deemed to have received the "boot." If each party to an exchange either assumes a liability of the other party or acquires property subject to a liability, the amounts of such liabilities will be offset and only the difference will be treated as "boot" given and received by the applicable parties.<a href="#_ftn4" name="_ftnref4">⁴</a> Generally, liabilities that qualify to offset or reduce any taxable boot received are those to which the property received was subject to prior to the exchange and that then are assumed as part of the exchange.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The Service ruled that if a partnership enters into an exchange that qualifies as a deferred like-kind exchange, in which property subject to a liability is transferred in one taxable year of the partnership, and property subject to a liability is received in the following taxable year of the partnership, the liabilities must be netted for purpose of IRC Section 752. Any net decrease in a partner's share of partnership liability must be taken into account for purposes of IRC Section 752(b) in the first taxable year of the partnership, and any net increase in a partner's share of partnership liability must be taken into account for purposes of IRC Section 752(a) in the second year of the partnership.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1031(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1031(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1031(h).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.1031(d)-2. <em><em>See</em></em> Rev. Rul. 59-229, 1959-2 CB 180.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. Treas. Reg. § 1.1031(d)-2, Ex. 2.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. Rev. Rul. 2003-56, 2003-23 IRB 985.<br /> <br /> </div>

<div class="Section1"><em>Editor's Note:</em> For tax years beginning after 2017, the nonrecognition treatment provided under IRC Section 1031 is limited to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">¹</a> This provision applies to exchanges occurring after December 31, 2017. An exception existed if either: (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.<a href="#_ftn2" name="_ftnref2">²</a> The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="Section1"><br /> <br /> If a like-kind exchange that results in nonrecognition of gain or loss occurs between related parties, followed by a disposition of either property within two years of the date of the last transfer that was part of the like-kind exchange, then the original transaction will not qualify for nonrecognition treatment.<a href="#_ftn4" name="_ftnref4">⁴</a> For purposes of this rule, the term "disposition" does not include dispositions resulting from the death of the taxpayer or (if earlier) the related person. The two-year disposition rule also will not apply to involuntary conversions, so long as the exchange occurred before the threat or imminence of the conversion. An exception is also provided where it can be established that neither the exchange nor the subsequent disposition had as its principal purpose the avoidance of income tax.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> "Related persons," for purposes of this rule, include the following: (1) members of the same family (i.e., brothers, sisters, spouses, ancestors and lineal descendants); (2) an individual and a corporation of which the individual actually or constructively owns more than 50 percent of the stock; (3) a grantor and a fiduciary of a trust; (4) fiduciaries of two trusts if the same person is the grantor of both; (5) a fiduciary and a beneficiary of the same trust; (6) a fiduciary of a trust and a beneficiary of another trust set up by the same grantor; (7) a fiduciary of a trust and a corporation of which the grantor of the trust actually or constructively owns more than 50 percent of the stock; (8) a person and an IRC Section 501 tax-exempt organization controlled by the person or members of his family (as described in (1) above); (9) a corporation and a partnership if the same person actually or constructively owns more than 50 percent of the stock of the corporation, and has more than a 50 percent interest in the partnership; (10) two S corporations if the same persons actually or constructively own more than 50 percent of the stock of each; (11) an S corporation and a C corporation, if the same persons actually or constructively own more than 50 percent of the stock of each; (12) a person and a partnership of which the person actually or constructively owns more than 50 percent of the capital interest or profits interest; (13) two partnerships if the same persons actually or constructively own more than 50 percent of the capital interest or profits interest of each; or (14) generally, an executor and a beneficiary of an estate.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Any transaction, or series of transactions, structured to avoid the related party rules for like-kind exchanges will not qualify for nonrecognition treatment.<a href="#_ftn7" name="_ftnref7">⁷</a> The Service has ruled that a taxpayer who transfers relinquished property to a qualified intermediary for replacement property formerly owned by a related party is <em>not</em> entitled to nonrecognition treatment under IRC Section 1031(a) if, as part of the transaction, the related party receives cash or other nonlike-kind property for the replacement property.<a href="#_ftn8" name="_ftnref8">⁸</a> If the risk of holding any property is substantially diminished by a short sale, by the holding of a put option, or by another person holding a right to acquire the property, then the running of the two-year period will be suspended during the period that the option or other right is held.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1031(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1031(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1031(h).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 1031(f)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 1031(f)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC §§ 1031(f)(3), 267(b), 707(b)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 1031(f)(4).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>. Rev. Rul. 2002-83, 2002-49 IRB 927.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 1031(g).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If a taxpayer who is a securities dealer uses the mark-to-market rules under IRC Section 475(f)(1) with respect to sales of securities held in connection with his or her business, the IRS has provided guidance requiring that the amount of any nonrecourse liabilities be included when calculating the fair market value of the securities.<br /> <br /> The IRS has addressed a situation where two partnerships originated and purchased mortgage loans and issued notes to third-party investors as mortgage-backed securities. The mortgage-backed securities were subject to nonrecourse liabilities. One partnership sold the securities to a third partnership, including the amount of the nonrecourse liabilities when calculating the amount realized in the sale. The purchasing partnership also included the nonrecourse liabilities when calculating its basis in the securities.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Both partnerships used mark-to-market accounting under IRC Section 475. However, the partnerships failed to include the value of the nonrecourse liabilities when calculating the fair market value of the securities for purposes of determining year-end gain or loss under the mark-to-market rules. In requiring that the partnerships include the nonrecourse liabilities in calculating fair market value, the IRS found that the fair market value of the property could be no less than the amount of any nonrecourse indebtedness to which the property is subject when determining gain or loss.<a href="#_ftn2" name="_ftnref2">²</a> The IRS found further that even if the Internal Revenue Code does not mandate this conclusion, Supreme Court precedent requires inclusion of any nonrecourse debt in determining fair market value for purposes of the mark-to-market rules.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. ILM 201507019.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 7701(g).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. <em>Commissioner v. Tufts,</em> 461 U.S. 300 (1983), <em>Crane v. Commissioner,</em> 331 U.S. 1 (1947).<br /> <br /> </div>

<p> Generally, a capital gain or loss is long-term if the property giving rise to the gain or loss was owned <em>for more than one year</em>. It is short-term gain or loss if the property was owned for <em>one year or less</em>.<a href="#_ftn1">¹</a> For an explanation of the tax treatment of capital gains and losses, <em><em>see</em></em> Q <a href="javascript:void(0)">702</a>. </p><p> To determine how long a taxpayer has owned property (i.e., his "holding period"), begin counting on the day <em>after</em> the property is acquired; the same date in each successive month is the first day of a new month. The date on which the property is disposed of is included (i.e., counted) in the holding period.<a href="#_ftn2">²</a> If property is acquired on the last day of the month, the holding period begins on the first day of the following month. Therefore, if it is sold prior to the first day of the 13th month following the acquisition, the gain or loss will be short-term.<a href="#_ftn3">³</a> According to IRS Publication 544 (released in November, 1982), if property is acquired <em>near</em> the end of the month and the holding period begins on a date that does not occur in every month (e.g., the 29th, 30th, or 31st), the last day of each month that lacks that date is considered to begin a new month; however, later editions of Publication 544 have omitted this statement. <br/><blockquote><em>Example 1.</em> Mrs. Copeland bought a capital asset on January 1, 2026. She would begin counting on January 2, 2026. The second day of each successive month would begin a new month. If Mrs. Copeland sold the asset on January 1, 2027, her holding period would not be more than one year. To have a long-term capital gain or loss she would have to sell the asset on or after January 2, 2027. <em>Example 2.</em> Mrs. Brim bought a capital asset on January 30, 2026. She would begin counting on January 31, 2026. Since February does not have 31 days, Mrs. Brim will start a new month on February 28. In months that have only 30 days, the thirtieth will begin a new month. </blockquote><br/> Special rules apply in the case of gains or losses on regulated futures contracts, single stock futures (<em><em>see</em></em> Q <a href="javascript:void(0)">7587</a>), nonequity option contracts, and foreign currency contracts (<em><em>see</em></em> Q <a href="javascript:void(0)">7592</a>). Furthermore, the short sale rules (<em><em>see</em></em> Q <a href="javascript:void(0)">7525</a>) and tax straddle rules (<em><em>see</em></em> Q <a href="javascript:void(0)">7593</a> to Q <a href="javascript:void(0)">7614</a>) may require a tolling or recalculation of an individual's holding period. <br/><strong>Tacking of Holding Periods</strong></p><p> In some cases, such as when property is received as a gift or in a like-kind exchange, the IRC allows a taxpayer to add another individual's holding period in the same property, or the taxpayer's holding period in other property, to the taxpayer's holding period. This is referred to as "tacking" of holding periods.<a href="#_ftn4">⁴</a></p><p> For an explanation of how the holding period is determined for stock received by a policyholder or annuity holder in a demutualization transaction, see SCA 200131028.<a href="#_ftn5">⁵</a></p><p> Where applicable, tacking of holding periods is discussed in the appropriate question. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 1222. </p><p> <a href="#_ftnref2">2</a>. Rev. Rul. 70-598, 1970-2 CB 168. </p><p> <a href="#_ftnref3">3</a>. Rev. Rul. 66-7, 1966-1 CB 188. </p><p> <a href="#_ftnref4">4</a>. IRC § 1223(2). </p><p> <a href="#_ftnref5">5</a>. See SCA 200131028. </p>