Question :
Sara and John Gleason engaged in some transactions which they supposed to be like-kind exchanges. When they filed their tax return, the IRS disputed their interpretation and supposed the sale of their property to be taxable.
Sara and John bought some farmland in January, 1985 for $475,000. They farmed the land since the purchase. On Feb 15, 2012 they sold the property to Farmland Inc and received the subsequent in return:
1) Cash of $50,000
2) A tract of farmland which had a fair market value of $175,000
3) Farm equipment which had a fair market value of $35,000
4) 3 rental properties
Property A had existing tenants and had a fair market value of $200,000.
Property B had been vacant for 6 months and had a fair market value of $325,000.
Property C had been vacant for 3 months and had a fair market value of $310,000.
Further information
On 1st March, 2012 John and Sara contributed the farmland to a corporation which they started. The reason of the corporation was to grow and market healthy vegetables.
On 12th January, 2011 John and Sara purchased a new primary residence for $275,000. They moved into the new residence on June 3, 2011 after extensive renovation. But Sara suffered from severe arthritis and had complexity maneuvering the stairs in the house.
Property B was a ranch with a walkout basement. The Gleasons put an ad in the local paper for about a month trying to rent Property B. Since nobody seemed interested in renting it, the Gleasons decided to move in themselves on March 31, 2012.
Property C was a 4 bedroom 2 bath home with a fenced in backyard. Sara's brother, who had custody of his children after a recent divorce, moved in on Oct 12, 2012. The Gleasons had no luck in renting. Sara's brother could only afford to pay one half of the market rent. He is still residing there.
Required:
1) Describe why the Gleasons felt that their exchange of property was a 1031 transaction.
2) Why the IRS disputed the Gleason's characterization
3) For each asset received describe whether it meets the needs for a like-kind exchange.
4) If you evaluate that some of the transactions are taxable, determine the amount of taxable income that should be added to the Gleason tax return for 2012.