Basis Rules for Like-Kind and Involuntary Conversions

If you keep mixing up basis in like-kind exchanges and involuntary conversions, use this shortcut: deferred gain reduces basis confusion. In both areas, the EA exam usually tests whether you know when basis carries over, when boot changes it, and when gain is recognized.

Like-kind exchange basis: start with old basis

For EA exam purposes, the easiest memory aid is:

Like-kind exchange basis = old basis, adjusted for boot and gain/loss recognized.

A common formula is:

Basis of new property = adjusted basis of old property
+ gain recognized
- money received
+ money paid
- loss recognized

In practice, most candidates remember it better this way:

• Start with the old property's adjusted basis.
• If cash is paid, basis goes up.
• If cash or other boot is received, basis goes down.
• If gain is recognized, basis goes up.

Why? Because like-kind exchanges generally defer gain, so the new property usually takes a substituted basis rather than a fresh fair market value basis.

Memory trick:

Like-kind = carryover mindset.
You are rolling the old investment into the new one, so the old basis follows the property unless boot forces an adjustment.

Involuntary conversion basis: did the gain get postponed?

In an involuntary conversion, property is destroyed, stolen, condemned, or disposed of under threat of condemnation. The basis rule depends on whether gain is recognized or postponed.

If replacement property is acquired and gain is postponed under the nonrecognition rules, the replacement property's basis is generally:

Cost of replacement property - gain postponed

That is the key exam idea.

Memory trick:

Involuntary conversion = cost minus postponed gain.

So if insurance proceeds are reinvested into qualified replacement property and gain is deferred, the basis in the new property is not simply what you paid. You reduce that cost by the gain you did not recognize.

If there is no deferral, then basis is generally just the normal basis of the acquired property, usually its cost.

How to keep them straight on the EA exam

Use this quick comparison:

• Like-kind exchange: think old basis carries over with adjustments.
• Involuntary conversion: think new cost reduced by deferred gain.

Another way to remember it:

• Exchange question? Look backward to the old asset's basis.
• Conversion question? Look at the replacement asset's cost and subtract postponed gain.

If basis questions keep tripping you up, drilling short calculation sets helps more than rereading rules. On Enrolled Angel at enrld.com, topic-based EA practice questions can help you spot which basis formula the exam is really asking for.

Practical takeaway

When you see these questions, do not start with fair market value unless the facts clearly require it. For like-kind exchanges, begin with the old basis. For involuntary conversions with deferral, begin with the new cost and subtract postponed gain. That one distinction solves a lot of EA exam basis questions.