Question 1

On February 1, Karin purchases real estate for $375,000.The annual property taxes of $5,040 are payable on December 31.Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing.Karin's adjusted basis for the real estate is:
A)$374,580.
B)$375,000.
C)$375,420.
D)$379,620.
E)None of the above.

Accepted Answer

The answer of On February 1, Karin purchases real estate...

Question 2

Katie sells her personal use automobile for $12,000.She purchased the car three years ago for $25,000.What is Katie's recognized gain or loss?
A)$0
B)$12,000
C)$13,000)
D)$25,000)
E)None of the above

Accepted Answer

The answer of Katie sells her personal use automobile for...

Question 3

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

Accepted Answer

The answer of To qualify for the § 121 exclusion,...

Question 4

Nat is a salesman for a real estate developer.His employer permits him to purchase a lot for $75,000.The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot?

Accepted Answer

The answer of Nat is a salesman for a real...

Question 5

Wyatt sells his principal residence in December 2018 and qualifies for the § 121 exclusion.He sells another principal residence in November 2019.Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Accepted Answer

The § 121 exclusion can be used multiple times, but only once every 2 years. If Wyatt meets the ownership and use requirements for the second residence, he may qualify for the § 121 exclusion on that sale as well, as long as it has been at least 2 years since he used the exclusion on the first residence.

Question 6

Joyce's office building was destroyed in a fire adjusted basis of $350,000; fair market value of $400,000).Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit.She received only $360,000 because of a co-insurance clause in her insurance policy.What is Joyce's recognized gain or loss?
A)$0
B)$10,000 loss
C)$10,000 gain
D)$40,000 gain
E)None of the above

Accepted Answer

The amount of insurance proceeds received by Joyce is less than the fair market value of the destroyed building, so she has a loss. However, because of the co-insurance clause in the insurance policy, she is only able to collect $360,000 of the $400,000 fair market value of the building. Therefore, she has a gain of $40,000 ($400,000 - $360,000).

Joyce used $310,000 of the insurance proceeds to purchase additional inventory, which is a like-kind exchange under Section 1033 of the Internal Revenue Code. This means that she can defer recognizing the gain on the insurance proceeds until she sells the inventory.

The remaining $50,000 that Joyce invested in short-term certificates of deposit is not a like-kind exchange, so it is taxable. The adjusted basis of the destroyed building was $350,000, so the taxable portion of the $50,000 investment is $10,000 ($50,000 - $40,000 basis in the destroyed building).

Therefore, Joyce has a recognized gain of $10,000.

Question 7

Gil's office building basis of $225,000 and fair market value $275,000) is destroyed by a hurricane.Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss.One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000.His adjusted basis for the new building is $307,500 $275,000 cost + $32,500 postponed loss).

Accepted Answer

The answer of Gil's office building basis of $225,000 and...

Question 8

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

Accepted Answer

This statement is true. The maximum amount of the § 121 gain exclusion on the sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple. This means that if the seller meets the eligibility criteria, they can exclude up to these amounts of capital gain from their taxable income.

Question 9

A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.

Accepted Answer

A taxpayer cannot recognize a loss on the sale of a principal residence, as it is considered a personal-use asset. Therefore, the taxpayer cannot elect to recognize the loss and the answer is false.

Question 10

Pedro borrowed $250,000 to purchase a machine costing $300,000.He later borrowed an additional $25,000 using the machine as collateral.Both notes are nonrecourse.Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000.Pedro sells the machine subject to the two liabilities for $45,000.What is his realized gain or loss?
A)$0
B)$45,000
C)$163,000
D)$208,000
E)None of the above

Accepted Answer

The answer of Pedro borrowed $250,000 to purchase a machine...

Question 11

Karen owns City of Richmond bonds with a face value of $10,000.She purchased the bonds on January 1, 2018, for $11,000.The maturity date is December 31, 2027.The annual interest rate is 4%.What is the amount of taxable interest income that Karen should report for 2018, and the adjusted basis for the bonds at the end of 2018, assuming straight-line amortization is appropriate?
A)$0 and $11,000
B)$0 and $10,900
C)$100 and $11,000
D)$100 and $10,900
E)None of the above

Accepted Answer

The answer of Karen owns City of Richmond bonds with...

Question 12

Capital recoveries include:
A)The cost of capital improvements.
B)Ordinary repair and maintenance expenditures.
C)Payments made on the principal of a mortgage on taxpayer's building.
D)Amortization of bond premium.
E)All of the above.

Accepted Answer

The answer of Capital recoveries include:
A)The cost of capital improvements.
B)Ordinary...

Question 13

Jason owns Blue Corporation bonds face value of $10,000), purchased on January 1, 2018, for $11,000.The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027.If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 assuming straight-line amortization is appropriate)?
A)$300 and $11,000
B)$300 and $10,900
C)$200 and $11,000
D)$200 and $10,900
E)None of the above

Accepted Answer

To amortize the bond premium, we need to calculate the annual amortization amount first:

Premium amortization per year = (purchase price - face value) / years to maturity
= ($11,000 - $10,000) / 10
= $100

So, Jason's amortization of bond premium for 2018 will be $100 ($10,000 * 3% = $300 - $100 = $200 taxable interest income).

Adjusted basis at the end of 2018 = purchase price - total amortization
= $11,000 - $100
= $10,900

Therefore, the correct choice is D.

Question 14

A realized gain on an indirect conversion into money) involuntary conversion of business property can be postponed, but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

Accepted Answer

This is true according to the tax code. A realized gain on an indirect involuntary conversion of business property can be postponed through reinvestment in similar property, but a realized loss cannot be postponed.

Question 15

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Accepted Answer

According to the tax code, when a taxpayer elects to postpone gain by replacing involuntarily converted property, the holding period of the replacement property includes the holding period of the converted property. This is true regardless of whether the taxpayer elected to use the like-kind exchange rules, the involuntary conversion rules, or the disaster-related rules.

Question 16

The taxpayer must elect to have the exclusion of gain under § 121 sale of principal residence) apply.

Accepted Answer

The exclusion of gain under § 121 for the sale of a principal residence automatically applies; the taxpayer does not need to make an election for it to take effect.

Question 17

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home.She builds an additional room on the house for $40,000.She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale.What is the recognized gain or loss on the sale of the house?
A)$0
B)$38,000
C)$70,000
D)$110,000
E)None of the above

Accepted Answer

The answer of Yolanda buys a house in the mountains...

Question 18

Albert purchased a tract of land for $140,000 in 2015 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000.Highway engineers surveyed the property and indicated that he would probably get $180,000.The highway project was abandoned in 2018 and the value of the land fell to $100,000.What is the amount of loss Albert can claim in 2018?
A)$40,000
B)$60,000
C)$80,000
D)$100,000
E)None of the above

Accepted Answer

The answer of Albert purchased a tract of land for...

Question 19

Carlton purchases land for $550,000.He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase.He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential.He subdivides the land and installs streets and sewers at a cost of $800,000.What is Carlton's basis for the land and the improvements?
A)$1,350,000
B)$1,378,000
C)$1,385,000
D)$1,413,000
E)None of the above

Accepted Answer

- Land purchase: $550,000
- Legal fees and broker's commission: $10,000 + $28,000 = $38,000
- Rezoning legal fees: $25,000
- Subdivision and installation of streets/sewers: $800,000
Total basis = $550,000 + $38,000 + $25,000 + $800,000 = $1,413,000

Question 20

Mary sells her personal use automobile for $20,000.She purchased the car two years ago for $17,000.What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.
A)$0
B)$3,000
C)$17,000
D)$20,000
E)None of the above

Accepted Answer

Mary's recognized gain is calculated as the selling price ($20,000) minus the adjusted basis ($17,000), which gives a gain of $3,000. The fact that the car increased in value due to its excellent mileage and safe design is not relevant in determining the recognized gain or loss.

Quiz 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges

On February 1, Karin purchases real estate for $375,000.The annual property taxes of $5,040 are payable on December 31.Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing.Karin's adjusted basis for the real estate is:

Katie sells her personal use automobile for $12,000.She purchased the car three years ago for $25,000.What is Katie's recognized gain or loss?