Oregon Tax Consultants Practice Exam

What do you do if you trade property in a like-kind exchange and receive money?

1. Ignore the cash amount

2. Deduct the cash from the basis

3. Add the cash to the basis of the property

4. Record it as a separate transaction

The correct answer is: Add the cash to the basis of the property

When engaging in a like-kind exchange, the treatment of cash received is important for determining the proper basis of the property acquired. In this type of exchange, when you trade one property for another, you typically defer any capital gains taxes on the transaction, provided certain requirements are met. If you receive cash as part of the exchange, this cash is referred to as "boot." The correct treatment for boot received in a like-kind exchange involves adding the cash amount to the basis of the replacement property. This adjustment is necessary because it reflects the total amount you have invested in the new property, thus allowing for an accurate calculation of future gains or losses when that property is eventually sold. By adding the cash to the basis, you ensure that your tax liability is aligned with the economic reality of your transaction, where part of your investment has been converted to cash. This calculation helps maintain the integrity of the deferral mechanism associated with like-kind exchanges.