Revenue Ruling 79-24: Tax Rules for Property Exchanges

When individuals or businesses exchange property without the use of cash, the transaction is considered a barter. The Internal Revenue Service (IRS) provides guidance on the tax implications of such exchanges. Revenue Ruling 79-24 specifically addresses how to determine and report the taxable outcome when one asset is traded for another, clarifying how to calculate any gain or loss.

The Core Principle of the Ruling

Revenue Ruling 79-24 clarifies that a property exchange is a taxable event. The ruling’s principle is that the fair market value of the property received represents the “amount realized” for tax purposes, a concept based on Section 61 of the Internal Revenue Code. This amount realized is then compared to the adjusted basis of the property you gave up. The difference between these two figures results in a taxable gain or a deductible loss, ensuring that any change in your original asset’s value is accounted for.

Determining Fair Market Value

Fair Market Value (FMV) is the price a property would sell for on the open market between a willing and informed buyer and seller. Establishing a credible FMV for tax purposes requires objective evidence to support the valuation.

Several methods are accepted for determining a property’s FMV. A formal appraisal by a qualified professional is a reliable method. Other approaches include researching recent sales of comparable properties (“comps”) or using published value guides for assets like equipment or vehicles.

The ruling provides a contingency for when the FMV of the property received cannot be determined. In these instances, the IRS permits using the FMV of the property given up as the benchmark. For example, if you exchange machinery with a clear market value for unique art with no recent sales data, the machinery’s value can be used to measure the amount realized.

The burden of proof rests with the taxpayer to substantiate the FMV. Without proper documentation, the IRS may challenge the valuation, potentially leading to adjustments, penalties, and interest.

Calculating and Reporting the Exchange

To account for a property exchange, you need two figures: the adjusted basis of the property you are giving away and the Fair Market Value (FMV) of the property you are receiving. An asset’s adjusted basis starts with its original cost and is modified by improvements or depreciation.

To calculate the outcome, subtract the adjusted basis of the property you relinquished from the FMV of the property you acquired. For instance, if you exchange land with an adjusted basis of $50,000 for a vehicle with an FMV of $70,000, your taxable gain is $20,000. This gain represents the land’s appreciation.

The transaction is detailed on Form 8949, Sales and Other Dispositions of Capital Assets. You will report the acquisition and disposition dates of your original property, the FMV of the property received as the sales price, and your adjusted basis. The calculated gain or loss is then carried over to Schedule D, Capital Gains and Losses.

Finally, the exchange establishes the tax basis for your new asset, which is its FMV on the date of the exchange. In the example, the vehicle’s new basis is $70,000. This figure is used to calculate depreciation or to determine the gain or loss on a future sale.