(1) For each of the following situations, the transaction may (or may not) be eligible (fully or partially) for tax-deferred treatment. (Assume that the exchanged properties are of equal value, with no mortgages or other loans against any of it.) For each, explain for both parties the extent of the tax-deferred eligibility, and explain WHY.
(a) I exchange my large home to Ann, for her small office building. She wants to tear down my house and build an apartment building on the site.
(b) Melvin, a builder, built five condos, but they aren't selling. He exchanges them to me for my apartment building. I will rent out four of the condos and live in the fifth one.
(c) I exchange my office building to Fred for his auto dealership; I get several buildings, a lot of land, and 111 new, unsold cars. I have arranged to lease the entire site to Flo, who will go into the car sales business; she also will buy the 111 cars from me.
(2) Jones's parking lot is worth $800,000. He has a mortgage loan of $420,000 against it. All the parking spaces are leased to people who park there during business hours.
Smith's gas station is worth $900,000 (it is leased for the next 20 years to Brown, who runs the business there.) Smith has a mortgage loan of $400,000 against her gas station property.
Jones and Smith wish to exchange their properties. Both are eligible for tax-deferred status.
(a) Tell me why they are.
(b) If they exchange, will either of them be at least partially liable for taxation on the transaction? If so, whom, how much, and why?