used with the land is not subject to SE tax. 

 [I.R.C. §§ 1401(a), 1402(a) and (b)] 



Example: Bruce Bullock owns a farm and 

 rents out the land for $20,000, buildings for 

 $5,000 and machinery for $10,000 to a family 

 partnership in which he materially partici- 

 pates. He mus pay SE tax on the $20,000 land 

 rent but not on the $5,000 building rent. Rent 

 on personal property is in general subject to SE 

 tax so he must pay SE tax on the machinery 

 rental of $10,000. The IRS is not likely to treat 

 it as falling under the exception for personal 

 property rented with real estate. [I.R.C. § 

 1402(a)(1)] Note: If Bruce's wife had owned the 

 farm and she was not a member of the 

 partnership, then she probably would avoid SE 

 tax on the land and building rental. 



Like-kind Exchanges 



Property used in a trade or business, or held 

 for investment, that is replaced by similar 

 property will be a like-kind exchange if certain 

 conditions are met. Any capital gain or loss 

 realized on the property given up in a like-kind 

 exchange must be deferred and the basis of the 

 new property adjusted accordingly. Deferral is 

 not elective. [I.R.C. § 1031] Form 8824 is used 

 to report the transfer and the basis of the 

 property acquired. It should be filed the year 

 the exchange takes place. 



Like-kind for real estate is interpreted 

 quite broadly. For example, timberland for 

 bare land, undeveloped farm land for a 

 commercial building. For personal property, 

 like-kind has a narrower definition. Automo- 

 biles, light general-purpose trucks (under 

 13,000 pounds actual unloaded weight) and 

 heavy general-purpose trucks are separate 

 categories. A trade from one category to 

 another is not a like-kind exchange. Any two 

 assets that are in the same four-digit SIC 

 (Standard Industrial Classification) code are 

 like-kind. Farm machinery qualifies since it is 

 all in SIC code 3523. However, small farm tools 

 and equipment are in several different 

 categories. [Treas. Reg. § 1.1031(a)-2] 



Sale of Principal Residence 



Up to $250,000 ($500,000 if married, fihng 

 jointly) of gain on the sale of a principal 

 residence is excluded from tax if all the 

 following requirements are met: 1. The 

 taxpayer (or either spouse) owned the home 

 for two or more years during the five-year 

 period preceding the sale; 2. The taxpayer (or 

 both spouses) used the home as personal 

 residence for two or more years during the five- 

 year period preceding the sale; 3. The taxpayer 

 (or neither spouse) has used the new exclusion 

 during the two-year period preceding the sale; 

 and 4. The sale occurred after May 6, 1997. 



A person who moves house every two years 

 could claim the exclusion each time. For sales 

 after May 6, 1997, few homeowners should be 

 faced with pa5ang capital gains on the sale of 

 their home. Form 2119 that was used to 

 rollover the gain on sale is no longer needed and 

 will be discontinued. (Note to Massachusetts 

 homeowners: the Commonwealth still follows 

 the Internal Revenue Code of previous years. 

 Presumably State tax forms will in future 

 include a substitute for Form 2119.) [I.R.C. § 

 121. I.R.C. § 1034, containing the rollover 

 provisions, has been repealed.] 



If part of the residence was used as an 

 office, or for business, and had been 

 depreciated, any gain allocated to that portion 

 would be subject to capital gains tax. See Table 

 1. 



Capital Grain 



Schedule D of Form 1040, which was 23 

 lines in 1996 has grown to 54 lines in 1997, 

 thanks to the complexities introduced by 

 TRA97. Profitable sales of assets held for one 

 year or less are short-term gains, whenever 

 sold. Profitable sales of assets held for 18 

 months or less, sold after July 28, 1997 are 

 short-term gains. These are taxed at the same 

 rate as ordinary income (maximum of 28%). 

 For sales of long-term assets after May 6, 1997 

 there are three rates: 28% (or 15% for 



Fruit Notes, Volume 62 (Number 3), Summer, 1997 



