Deck 12: Property Transactions: Nontaxable Exchanges

Question 1

The holding period of like-kind property received in a nontaxable exchange begins on the day of the exchange.

Answer 1

False
Explanation: The holding period includes the holding period of the like-kind property if that property is a capital asset or 1231 property.

Question 2

Which of the following statements with respect to a like-kind exchange is false?

A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.

Answer 2

D
Explanation: Sale of property and subsequent purchase of like-kind property only qualifies if the two transactions are interdependent.

Question 3

If each party in a like-kind exchange assumes a liability of the other party, only the net liability given or received is boot.

Answer 3

True
Explanation: The exchange of liabilities is netted to determine which party is deemed to have received boot and which party is deemed to have paid boot.

Question 4

If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be retained for three years after the exchange to prevent recognition of gain resulting from the original exchange on a subsequent disposition of the property.

Question 5

Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition treatment.

Question 6

All of the following qualify as a like-kind exchange except

A) an apartment building held for investment for farmland used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a general purpose truck used in trade or business.

Question 7

The exchange of a personal-use automobile for stock in an automobile manufacturer held as an investment qualifies for like-kind treatment.

Question 8

An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

Question 9

An investor exchanges an office building located in Niagara Falls, NY for an office building located in Niagara Falls, Ontario. The exchange does not qualify as like-kind.

Question 10

The basis of non-like-kind property received is the basis in the hands of the transferor at the date of the exchange.

Question 11

The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind exchange.

Question 12

For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.

Question 13

If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

Question 14

A sale of property and subsequent purchase of like-kind property may be treated as a like-kind exchange if the two transactions are interdependent.

Question 15

The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.

Question 16

In a like-kind exchange, both the property transferred and the property received must be held by the taxpayer either for productive use in a trade or business or for investment.

Question 17

The holding period for boot property received begins on the day after the date of the exchange.

Question 18

An investor in artwork holds a Picasso painting which has appreciated substantially since she purchased it. The art investor exchanges the Picasso for a Van Gogh painting of similar value. The transaction qualifies as a like-kind exchange and the gain will not be recognized.

Question 19

Real property exchanged for personal property qualifies as a like-kind exchange.

Question 20

Where non-like-kind property other than cash is received as boot, the amount of the boot is the property's fair market value.

Question 21

All of the following are true except:

A) A nonsimultaneous exchange may never qualify as a like-kind exchange.
B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an otherwise like-kind exchange.
D) The holding period of like-kind property received includes the holding period of the property exchanged.

Question 22

In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri's basis in the new truck?

A) $5,000
B) $8,500
C) $13,500
D) $15,000

Question 23

Laurie owns land held for investment. The land's FMV is $150,000. Laurie's basis in the land is $130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey's basis in the warehouse is $120,000. Laurie's basis in the warehouse received will be

A) $150,000.
B) $170,000.
C) $190,000.
D) $210,000.

Question 24

Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment with a $100,000 FMV and $20,000 of marketable securities. What is Rosa's basis for the new equipment?

A) $60,000
B) $80,000
C) $100,000
D) $120,000

Question 25

Kai owns an apartment building held for investment purposes. The apartment building is worth $500,000, although it is subject to a mortgage of $100,000. Kai's basis in the apartment building is $380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of $350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party assumes the apartment building mortgage. What is Kai's recognized gain on this exchange?

A) $0
B) $50,000
C) $120,000
D) $150,000

Question 26

Glen owns a building that is used in business. The building is worth $200,000, but is subject to a mortgage of $40,000. Glen's basis in the building is $120,000. Glen exchanges the building for investment land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be held for investment. Glen must recognize a gain of

A) $0.
B) $10,000.
C) $50,000.
D) $80,000.

Question 27

Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie's basis in the new equipment is

A) $130,000.
B) $140,000.
C) $160,000.
D) $170,000.

Question 28

Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?

A) $0
B) $4,000
C) $6,000
D) $10,000

Question 29

Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle is for personal use. What is the amount of recognized gain?

A) $0
B) $10,000
C) $20,000
D) $30,000

Question 30

Which of the following statements is not true with regard to like-kind exchanges?

A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
B) The holding period of like-kind property received includes the holding period of the property exchanged.
C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a personal use car) in an otherwise like-kind exchange.
D) The basis of property received in an exchange is equal to the basis of the property exchanged less the boot received plus the gain recognized and less any loss recognized.

Question 31

Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?

A) $0
B) $20,000
C) $40,000
D) $60,000

Question 32

Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis $120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the warehouse. Jason's basis in the land received will be

A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.

Question 33

Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges the warehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis $240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the exchange of

A) $80,000.
B) $120,000.
C) $190,000.
D) $200,000.

Question 34

Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by Emily on the exchange is

A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.

Question 35

Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela). Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by Pamela. Pamela must recognize a gain of

A) $ 0.
B) $ 40,000.
C) $ 120,000.
D) $ 140,000.

Question 36

Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000 plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the new parcel. Due to the exchange, Landry will recognize

A) $10,000 gain.
B) $5,000 gain.
C) $5,000 loss.
D) $0.

Question 37

A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A's ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?

A) The transaction qualifies as a like-kind exchange for B but not for A.
B) The transaction qualifies as a like-kind exchange for both B and A.
C) The transaction qualifies as a like-kind exchange for A but not for B.
D) The transaction does not qualify as a like-kind exchange for either B or A.

Question 38

Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also provided stock worth $25,000. Yael's adjusted basis in the building and stock is $180,000 and $11,000, respectively. How much gain or loss will Yael recognize on the exchange?

A) $0
B) ($30,000)
C) ($16,000)
D) $14,000

Question 39

Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also provided stock worth $25,000. Rolf's adjusted basis in the building and stock is $130,000 and $11,000, respectively. How much gain will Rolf recognize on the exchange?

A) $0
B) $14,000
C) $20,000
D) $34,000

Question 40

If there is a like-kind exchange of property between related parties, how long do they have to wait to dispose of the property received in order to avoid having to recognize any gain on the exchange?

A) 6 months
B) 1 year
C) 2 years
D) no waiting period

Question 41

Discuss the rules regarding the holding period for like-kind property received in a nontaxable exchange.

Question 42

Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the painting on September 5, 2015, for a Picasso painting and marketable securities to be held as an investment. On what date does the Picasso painting's holding period begin?

A) June 1, 2008
B) June 2, 2008
C) September 5, 2015
D) September 6, 2015

Question 43

If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to a party other than the governmental unit that is threatening to condemn the property.

Question 44

If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying replacement property is acquired within a specified time period at a cost equal to or greater than the amount realized on the involuntary conversion.

Question 45

Indicate with a "yes" or a "no" which of the following are like-kind exchanges (assume all assets are held for business or investment purposes).
a. Exchange of common stock held as an investment for land held as an investment.
b. Exchange of farmland for an apartment building.
c. Exchange of office furniture used in trade or business for computer used in a trade or business
d. Exchange of unimproved real estate for improved real estate.
e. Exchange of automobile used in trade or business for office building used in trade or business

Question 46

Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office equipment with a fair market value of $12,000.
a. What is the gain or loss realized?
b. What is the gain or loss recognized?
c. What is the adjusted basis of the new office equipment?

Question 47

Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV. Whitney's basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a $10,000 FMV as part of the exchange.
a. What is the amount, if any, of gain or loss recognized on the transaction?
b. What is the basis of the undeveloped land?

Question 48

The involuntary conversion provisions which allow deferral of gain are mandatory.

Question 49

Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000 cash and a trotter (another racehorse) with a $150,000 fair market value.
a. What is the amount of gain realized by Trent?
b. What is the amount of gain recognized by Trent?
c. What is the adjusted basis of the trotter?

Question 50

A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.

Question 51

In an involuntary conversion, the basis of replacement property is its cost reduced by the gain deferred.

Question 52

Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000 fair market value. In addition, he receives $20,000 of marketable securities.
a. What is the amount of gain realized by Eric?
b. What is the amount of gain recognized by Eric?
c. What is Eric's basis in the new printing press?
d. What is Eric's basis in the marketable securities?

Question 53

Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair market value to be used in business.
a. What is the amount of gain or loss realized by Amelia?
b. What is the amount of gain or loss recognized by Amelia?

Question 54

All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if qualifying replacement property is acquired within the requisite period of time.

Question 55

Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.
a. What is the amount of gain realized and recognized by Olivia on each asset?
b. What is the amount of Olivia's basis in the new land?

Question 56

Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth $850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for $40,000.
a. What are Marinda's realized and recognized gains (losses) on the two assets exchanged?
b. What is Marinda's basis in the warehouse acquired?

Question 57

Discuss the basis rules of property received in a nontaxable like-kind exchange.

Question 58

Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of $60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair market value.
a. If Cheryl and John exchange their stock, what is the amount of Cheryl's realized gain?
b. If Cheryl and John exchange their stock, what is the amount of Cheryl's recognized gain?

Question 59

Indicate with a "yes" or a "no" which of the following are like-kind exchanges.
a. Computer used in trade or business for office furniture used in trade or business.
b. Apartment building held as an investment for an office building used in trade or business.
c. Land used in trade or business for equipment used in trade or business.
d. Printer used in trade or business for printer used for personal purposes.
e. Exchange of improved real estate held for investment for unimproved real estate held for investment.

Question 60

Kevin exchanges an office building used in his business for another office building worth $200,000 plus $30,000 cash. The FMV of Kevin's old building is $280,000 (basis $150,000) and it is subject to a mortgage of $50,000. The mortgage is assumed by the other party.
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?

Question 61

Alex owns an office building which the state condemns on January 15, 2015. Alex receives the condemnation award on April 1, 2015. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Alex to acquire qualified replacement property?

A) April 1, 2017
B) April 1, 2018
C) December 31, 2017
D) December 31, 2018

Question 62

When the cost of replacement property is less than the amount realized on an involuntary conversion, gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the replacement property, but not more than the total realized gain.

Question 63

If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the replacement property begins on the date of purchase.

Question 64

Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of

A) $0.
B) $30,000.
C) $60,000.
D) $90,000.

Question 65

Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. Assuming the proper election is made to defer gain, Stephanie's basis in the new building will be

A) $175,000.
B) $180,000.
C) $200,000.
D) $210,000.

Question 66

Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. If the proper election is made, Stephanie will recognize gain of

A) $ 0.
B) $15,000.
C) $20,000.
D) $25,000.

Question 67

When an involuntary conversion is due to the condemnation of real property held for productive use in a trade or business or for investment, the replacement period will end three years after the close of the first tax year in which any part of the gain is realized.

Question 68

If property is involuntarily converted into similar property, the basis and holding period of the converted property carry over to the basis and holding period of the replacement property.

Question 69

Which of the following statements is false regarding involuntary conversions?

A) A taxpayer must replace the destroyed property within the same tax year in which the gain is realized.
B) A taxpayer cannot elect to defer recognition of a loss resulting from an involuntary conversion.
C) If deferral of gain is elected, the holding period of the converted property carries over to the replacement property.
D) Gain may be deferred if the property is involuntarily converted into property that is similar or related in service or use to the converted property.

Question 70

The building used in Terry's business was condemned by the city of St. Louis. Terry received a condemnation award of $125,000. He paid $1,200 in lawyer's fees and $800 for an appraisal of the property. Terry's adjusted basis in the building was $60,000. Terry reinvests in similar property costing $110,000, and Terry makes the proper election regarding the property. What is the amount of Terry's recognized gain on the condemnation?

A) $15,000
B) $13,000
C) $50,000
D) $63,000

Question 71

Each of the following is true of deferral of gain attributable to the involuntary conversion of personal property with the exception of

A) gain deferral is elective, except for direct conversions.
B) the replacement property may be acquired by gift, inheritance, or purchase.
C) qualifying replacement property must be acquired within a specified time period.
D) replacement property must be similar or related in service or use to the converted property.

Question 72

Which of the following statements regarding involuntary conversions is incorrect?

A) With some exceptions, the replacement property must be similar or related in service or use to the property converted.
B) The functional-use test is more restrictive than the like-kind test.
C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.
D) Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property.

Question 73

Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for $550,000. What is the amount of gain recognized on the transaction?

A) $0
B) $50,000
C) $350,000
D) $400,000

Question 74

Vector Inc.'s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally settles with the insurance company on February 3, 2015. In order to defer the gain realized on the building, Vector must acquire another office building by February 3, 2017.

Question 75

The building used in Tim's business was condemned by the city of Lafayette. Tim received a condemnation award of $125,000. He paid $1,200 in lawyer's fees and $800 for an appraisal of the property. Tim's adjusted basis in the building was $60,000. Tim reinvests in similar property costing $110,000, and Tim makes the proper election regarding the property. What is the amount of Tim's realized (not recognized) gain on the condemnation?

A) $ 0
B) $50,000
C) $63,000
D) $65,000

Question 76

Juan's business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition?

A) $40,000
B) $32,000
C) $10,000
D) $22,000

Question 77

Replacing a building with land qualifies as replacement property under the involuntary conversion rules relevant to a casualty.

Question 78

Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron's basis in the new building is

A) $180,000.
B) $210,000.
C) $240,000.
D) $330,000.

Question 79

The building used in Manuel's business was condemned by the city of Mobile. Manuel received a condemnation award of $220,000. He paid $800 in lawyer's fees and $600 for an appraisal of the property. Manuel's adjusted basis in the building was $120,000. Manuel reinvests in similar property costing $200,000, and Manuel makes the proper election regarding the property. Manuel's basis in the new building is

A) $102,400.
B) $121,400.
C) $120,000.
D) $200,000.

Question 80

If real property used in a trade or business or held for investment is condemned, it must be replaced with property having a similar functional use.