Question 1

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.

Accepted Answer

This is known as a like-kind exchange and is allowed under Section 1031 of the Internal Revenue Code. The basis and holding period of the original property are transferred to the replacement property.

Question 2

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

Accepted Answer

Under the involuntary conversion rules, replacement property must be similar or related in service or use to the property that was converted. Land and buildings are not considered similar or related in service or use.

Question 3

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.

Accepted Answer

According to the IRS, if the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, they may elect to defer gain even if the property is sold to a party other than the governmental unit threatening to condemn the property. This is known as an involuntary conversion and can allow the taxpayer to defer the gain on the sale of the property.

Question 4

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.

Accepted Answer

This statement is true according to the Internal Revenue Code section 1033. The replacement period for an involuntary conversion due to condemnation of real property held for productive use in a trade or business or for investment is extended to three years from the close of the first tax year in which any part of the gain is realized.

Question 5

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

Accepted Answer

A taxpayer may elect to defer recognition of a gain, not a loss, resulting from an involuntary conversion by reinvesting in similar property.

Question 6

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

Accepted Answer

Ron received $300,000 from insurance, which is $90,000 more than his adjusted basis of $210,000, resulting in a realized gain of $90,000. However, he reinvested $240,000 in a new building, deferring $60,000 of the gain. Therefore, he recognizes a gain of $30,000 ($90,000 realized gain - $60,000 deferred gain).

Question 7

Vector Inc.'s office building burned down on October 31,2017.Vector,a calendar-year taxpayer,finally settles with the insurance company on February 3,2018.In order to defer the gain realized on the building,Vector must acquire another office building by February 3,2020.

Accepted Answer

The answer of Vector Inc.'s office building burned down on...

Question 8

All of the following are true except

Accepted Answer

A nonsimultaneous exchange can still qualify as a like-kind exchange as long as the requirements are met. A like-kind exchange refers to the exchange of two properties that are of the same nature or character. Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange. However, a loss may not be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an otherwise like-kind exchange. The holding period of like-kind property received includes the holding period of the property exchanged.

Question 9

Kuda owns a parcel of land she acquired on June 1,2012,as an investment.She exchanges the land on July 5,2019,for a storage building to be used in her business and marketable securities to be held as an investment.The marketable securities' holding period begins on

Accepted Answer

The holding period for the marketable securities begins on July 6, 2019, which is the day after the exchange took place. The original acquisition of the land on June 1, 2012, is not relevant in determining the holding period for the marketable securities.

Question 10

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?

Accepted Answer

The answer of Juan's business delivery truck is destroyed in...

Question 11

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

Accepted Answer

The involuntary conversion provisions are not mandatory; they are elective. Taxpayers can choose to defer the gain by reinvesting in similar property, but they are not required to do so.

Question 12

Kuda owns a parcel of land she acquired on June 1,2012,as an investment.She exchanges the land on July 5,2019,for a storage building to be used in her business and marketable securities to be held as an investment.On what date does the storage building's holding period begin?

Accepted Answer

The holding period for the storage building begins on June 1, 2012, because the exchange is a like-kind exchange under IRS rules, allowing the holding period of the land to carry over to the new property.

Question 13

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

Accepted Answer

When a taxpayer defers gain under the involuntary conversion rules, the basis in the new property is the cost of the new property minus the deferred gain. The deferred gain is the insurance proceeds ($200,000) minus the adjusted basis of the old property ($175,000), which is $25,000. The cost of the new property is $180,000, so the basis in the new property is $180,000 - $25,000 = $155,000. However, since the question asks for the basis assuming the proper election is made to defer gain, the basis in the new building is the same as the adjusted basis of the old building, which is $175,000.

Question 14

In order to fully defer the gain realized on the involuntary conversion of property,the taxpayer must acquire qualifying replacement property costing at least as much as the cost of the original property.

Accepted Answer

To fully defer the gain, the taxpayer must acquire replacement property costing at least as much as the amount realized from the involuntary conversion, not the original cost of the property.

Question 15

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.

Accepted Answer

This is true according to the tax code. Gain realized on an involuntary conversion, such as property taken by eminent domain, can be deferred but not permanently excluded if qualifying replacement property is acquired within the requisite period of time.

Question 16

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.

Accepted Answer

The holding period of the replacement property includes the holding period of the converted property if the gain is deferred.

Question 17

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

Accepted Answer

In an involuntary conversion, such as when property is destroyed or condemned, the taxpayer can defer the gain and use it towards the basis of the replacement property. This means that the basis of the replacement property is equal to its cost reduced by the amount of gain that was deferred.

Question 18

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.

Accepted Answer

The answer of If real property used in a trade...

Question 19

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 to defer gain,Stephanie will recognize gain of

Accepted Answer

Stephanie's recognized gain is the insurance reimbursement minus the adjusted basis, which is $200,000 - $175,000 = $25,000. However, she reinvested $180,000, so the deferred gain is $200,000 - $180,000 = $20,000. Thus, she recognizes a gain of $20,000.

Question 20

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.

Accepted Answer

When the cost of replacement property is less than the amount realized from an involuntary conversion, the gain recognized is the excess of the amount realized over the cost of the replacement property, limited to the total realized gain.

Quiz 28: Property Transactions: Nontaxable Exchanges