Question 1

An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.

Accepted Answer

Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of like-kind property used in a trade or business or held for investment. However, it does not apply to exchanges of personal property (personalty) after the Tax Cuts and Jobs Act of 2017; it now applies only to real property.

Question 2

Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000).In addition, he receives cash of $6,000.If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).

Accepted Answer

If the exchange qualifies as a like-kind exchange, there is no recognized gain, and Cole's adjusted basis for the property received would be the same as the adjusted basis of the property exchanged ($15,000). The cash received is treated as boot and may result in a taxable gain.

Question 3

Pat owns a 1965 Ford Mustang which he uses for personal use.He purchased it four years ago for $22,000, and it currently is worth $27,000.He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000.Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

Accepted Answer

The answer of Pat owns a 1965 Ford Mustang which...

Question 4

In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized gain, but receives a new basis if there is a realized loss.

Accepted Answer

In a nontaxable exchange, the basis of the replacement property is generally a carryover basis, regardless of whether there is a realized gain or loss, to ensure that the gain or loss is deferred until the replacement property is sold or disposed of in a taxable transaction.

Question 5

Terry exchanges real estate (acquired on August 25, 2011) held for investment for other real estate to be held for investment on September 1, 2017.None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000.Consequently, Terry's holding period for the new real estate begins on August 25, 2011.

Accepted Answer

The holding period for the new real estate begins on the date that Terry acquired the original real estate, which is August 25, 2011, since he is using a carryover basis. Therefore, the statement is true.

Question 6

If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

Accepted Answer

This is a basic rule in a § 1031 like-kind exchange. If boot (cash or any other non-like-kind property) is received, it will trigger recognition of gain to the extent of the lesser of the realized gain or the amount of boot received.

Question 7

Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock.Leonore's adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000.Leonore's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.
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Accepted Answer

Leonore has realized a recognized gain of $50,000 ($350,000 - $300,000) when she exchanged the Pelican stock for Blue Heron stock. However, if the exchange qualifies as a like-kind exchange under Section 1031 of the Internal Revenue Code, Leonore may be able to defer recognition of the gain. The adjusted basis for the Blue Heron stock would be the same as the adjusted basis for the Pelican stock before the exchange, which is $300,000.

Question 8

The surrender of depreciated boot (fair market value is less than adjusted basis) in a like-kind exchange can result in the recognition of loss.

Accepted Answer

If the fair market value of the boot surrendered in a like-kind exchange is less than its adjusted basis, the difference between the adjusted basis and the fair market value would be recognized as a loss. This loss is not deductible but reduces the basis of the newly acquired property.

Question 9

Lola owns land as an investor.She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory.The exchange does qualify for like-kind exchange treatment.

Accepted Answer

The exchange of land for a warehouse qualifies for like-kind exchange treatment, as both are considered real property. Additionally, the fact that Lola leases the warehouse to a tenant for business purposes does not have an effect on the like-kind exchange treatment.

Question 10

When boot in the form of cash is given in a like-kind exchange, recognized gain is the greater of the boot or the realized gain.

Accepted Answer

Recognized gain in a like-kind exchange when boot is received is the lesser of the realized gain or the amount of boot received, not the greater.

Question 11

A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.

Accepted Answer

Under U.S. tax law, property used in a trade or business or held for investment can qualify for a like-kind exchange, but both properties must be located within the United States. Property in the U.S. cannot be exchanged for property outside of the U.S. and still qualify for like-kind exchange treatment.

Question 12

The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

Accepted Answer

Under § 1031 of the Internal Revenue Code, the nonrecognition of gains and losses on like-kind exchanges is mandatory for both gains and losses, not elective for losses.

Question 13

Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.

Accepted Answer

The answer of Livestock of different sexes can qualify for...

Question 14

Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000).In addition, she receives $100,000 of cash.Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).

Accepted Answer

Shari's recognized gain is $100,000 because it is the lesser of the gain realized ($200,000, which is the difference between the fair market value of the apartment building plus cash received [$900,000 + $100,000] and the adjusted basis of the office building [$700,000]) or the boot received ($100,000 in cash). However, her basis in the apartment building is $800,000, which is calculated by taking the adjusted basis of the office building ($700,000), adding the gain recognized ($100,000), and then subtracting the cash received ($100,000), not by adding the recognized gain to the adjusted basis of the office building.

Question 15

If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Accepted Answer

The holding period for the like-kind property received in a § 1031 exchange tacks onto the holding period of the property exchanged (i.e., it continues from the original property's holding period), while the holding period for the boot received begins on the date of the exchange.

Question 16

In a nontaxable exchange, recognition is postponed.In a tax-free transaction, nonrecognition is permanent.

Accepted Answer

In a nontaxable exchange, taxes on gains are deferred, meaning recognition of any gain or loss is postponed to a future date. In a tax-free transaction, such as certain types of reorganizations or exchanges specifically exempted by tax law, recognition of gain or loss is permanently avoided, not just deferred.

Question 17

The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.

Accepted Answer

The basis of boot received in a like-kind exchange is added to the basis of the other property received, and it does not directly take its fair market value as its basis. The basis adjustment reflects the gain recognized, not the fair market value of the boot.

Question 18

To qualify as a like-kind exchange, real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.

Accepted Answer

To qualify as a like-kind exchange under IRS rules, real property must be exchanged for other real property of a like-kind, not for personal property, regardless of its statutory life.

Question 19

Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business.If Clark is Kate's father, her realized gain of $150,000 must be recognized because they are related parties.

Accepted Answer

The fact that Clark is Kate's father (a related party) does not automatically trigger recognition of gain in an exchange of like-kind property intended for business or investment purposes under IRC Section 1031. The related party rules primarily affect the deferral of loss, not gain.

Question 20

The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.

Accepted Answer

The exchange of real property for like-kind property, regardless of location, can qualify as a like-kind exchange under certain conditions.

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