Question 1

A factory building owned by Amber, Inc.is destroyed by a hurricane.The adjusted basis of the building was $400,000 and the appraised value was $425,000.Amber receives insurance proceeds of $390,000.A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000.What is the recognized gain or loss and what is the basis of the new factory building?
A)$0 and $450,000.
B)$0 and $460,000.
C)($10,000) and $440,000.
D)($10,000) and $450,000.
E)None of the above.

Accepted Answer

The first step is to calculate the adjusted basis of the destroyed building, taking into account the insurance proceeds received: Adjusted basis = Original basis - Insurance proceeds = $400,000 - $390,000 = $10,000 loss. 
Since the new factory building was constructed within 3 years and at a cost greater than or equal to the adjusted basis of the destroyed building, there is no recognized gain or loss. The basis of the new factory building is equal to its cost, which is $450,000. Therefore, the answer is (D) ($10,000) and $450,000.

Question 2

Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (fair market value of $93,000) to be used in her business in a like-kind exchange.What is Molly's recognized gain or loss?
A)$0
B)$5,000
C)($2,000)
D)($7,000)
E)None of the above

Accepted Answer

The answer of Molly exchanges a small machine (adjusted basis...

Question 3

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017.On January 11, 2018, the insurance company paid the owner $450,000.The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss.The owner reinvested $410,000 in a new office building on February 12, 2018, that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?
A)$0 and $320,000.
B)$0 and $410,000.
C)$40,000 and $320,000.
D)$130,000 and 410,000.
E)None of the above.

Accepted Answer

Under § 1033, nonrecognition of gain from an involuntary conversion occurs when the taxpayer replaces the destroyed property with property that is similar or related in service or use. In this case, the owner reinvested $410,000 in a new office building, which meets the requirement of replacement property.
The recognized gain is calculated as the difference between the insurance proceeds and the adjusted basis of the destroyed property: 
$450,000 - $320,000 = $130,000. 
However, since the owner elected to use § 1033, the recognized gain is postponed and not included in income. 
The basis of the new building is calculated as the cost of replacement property minus any postponed gain: 
$410,000 - $130,000 = $280,000. 
Since the new building is smaller than the original building, it does not affect the basis calculation. Therefore, the correct answer is C) $40,000 recognized gain and $320,000 basis of the new building.

Question 4

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000.In addition, Pam receives $100,000 in cash.What is the recognized gain or loss and the basis of the investment land?
A)$0 and $420,000.
B)$100,000 and $420,000.
C)$100,000 and $520,000.
D)$280,000 and $700,000.
E)None of the above.

Accepted Answer

When exchanging property, the gain or loss is not recognized if it is a like-kind exchange. In this case, since Pam exchanged a rental building for investment land, which are both considered real property, the exchange qualifies as a like-kind exchange. Therefore, no gain or loss is recognized.

The basis of the investment land is determined by taking the adjusted basis of the relinquished property (rental building) and adding any cash received in the exchange.

Basis of Investment Land = Adjusted Basis of Rental Building + Cash Received
Basis of Investment Land = $520,000 + $100,000
Basis of Investment Land = $620,000

Therefore, the recognized gain or loss is $0 and the basis of the investment land is $620,000.

Question 5

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2017.If the insurance settlement was $950,000 (received March 1, 2018), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?
A)December 31, 2017.
B)August 31, 2018.
C)December 31, 2019.
D)August 31, 2020.
E)None of the above.

Accepted Answer

Under § 1033 of the Internal Revenue Code, when property used in a trade or business or held for investment is involuntarily converted (e.g., destroyed by fire), the taxpayer can elect to defer recognition of gain if they reinvest the proceeds into similar property within a certain period. For non-personal-use property, the replacement period generally ends two years after the close of the first taxable year in which any part of the gain is realized. Since Jared's fiscal year ends on August 31, and the insurance settlement was received in the fiscal year ending August 31, 2018, the latest date by which he must replace the office building to qualify for nonrecognition of gain under § 1033 is two years after the end of that fiscal year, which is August 31, 2020.

Question 6

Melvin receives stock as a gift from his uncle.No gift tax is paid.The adjusted basis of the stock is $30,000 and the fair market value is $38,000.Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash.What is his recognized gain and the basis for the bonds?
A)$0, $30,000.
B)$5,000, $33,000.
C)$5,000, $30,000.
D)$8,000, $33,000.
E)None of the above.

Accepted Answer

The answer of Melvin receives stock as a gift from...

Question 7

Dena owns 500 acres of farm land in southeastern Maryland.Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land.She exchanges the land for an office building owned by Chris in Newark, New Jersey.The building has a fair market value of $900,000.Chris assumes Dena's mortgage on the land.What is the amount of Dena's recognized gain or loss on the exchange?
A)$0
B)$400,000
C)$500,000
D)$820,000
E)None of the above

Accepted Answer

Dena's recognized gain is the difference between the fair market value of the office building she receives ($900,000) and her adjusted basis in the land ($480,000). However, because Chris assumes Dena's $400,000 mortgage, this effectively increases the amount Dena "receives" to $1,300,000 ($900,000 + $400,000). The recognized gain is calculated as the fair market value of what she received minus her adjusted basis in the land she gave up. However, for the purpose of this calculation, the correct recognized gain is based on the fair market value of the office building alone because the mortgage assumption is treated as part of the exchange but does not directly affect the recognized gain calculation as initially described. Therefore, the recognized gain is $900,000 (value of the building) - $480,000 (adjusted basis) = $420,000. Given the options provided, none directly match this calculation, indicating a need for clarification in the explanation or a reevaluation of the provided options. The closest option based on standard tax treatment would be $400,000, considering it as a simplified scenario where the mortgage relief is directly subtracted from the fair market value of the received property, but this simplification overlooks the specifics of how mortgage relief impacts the recognized gain in a like-kind exchange.

Question 8

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?
A)Lily's recognized gain is $50,000 and her basis for the building received is $120,000.
B)Lily's recognized gain is $50,000 and her basis for the building received is $170,000.
C)Lily's recognized gain is $0 and her basis for the building received is $120,000.
D)Lily's recognized gain is $0 and her basis for the building received is $170,000.
E)None of the above is correct.

Accepted Answer

In a like-kind exchange, such as the one described, Lily's recognized gain is $0 because the exchange is of similar property used in a trade or business. Her basis for the new building is the same as the adjusted basis of the building she gave up, which is $120,000.

Question 9

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?
A)An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.
B)The postponement of realized gain in a § 1033 involuntary conversion is elective.
C)The functional use test is satisfied if a business warehouse is replaced with another business warehouse.
D)The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.
E)All of the above are correct.

Accepted Answer

All the statements provided are correct regarding § 1033 involuntary conversions. Statement A outlines the timing for reinvestment of proceeds to postpone gain, B confirms that postponement is elective, C and D describe scenarios where the functional use and taxpayer use tests are satisfied, respectively, which are all key aspects of § 1033.

Question 10

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000).The property transfers were made subject to the mortgages.What amount of gain should Paula recognize?
A)$0
B)$25,000
C)$125,000
D)$175,000
E)None of the above

Accepted Answer

The answer of On October 1, Paula exchanged an apartment...

Question 11

Joyce, a farmer, has the following events occur during the tax year.Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?
A)Her farm tractor is hauled to the city dump because it is worn out.
B)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement.
C)Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway.She recovers condemnation proceeds of $175,000.
D)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.
E)None of the above.

Accepted Answer

Only event C qualifies as an involuntary conversion under § 1033 since it involves the condemnation of Joyce's personal residence by the government. Events A and D are voluntary conversions since Joyce chose to sell the land to reduce the size of her herd. Similarly, event B is also a voluntary conversion since Joyce chose to sell the pasture land in preparation for her retirement.

Question 12

Nancy and Tonya exchanged assets.Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000.The house has a mortgage of $200,000 which is assumed by Tonya.Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000.What is Tonya's realized and recognized gain?
A)$310,000 realized and $310,000 recognized gain.
B)$310,000 realized and $0 recognized gain.
C)$110,000 realized and $110,000 recognized gain.
D)$110,000 realized and $0 recognized gain.
E)None of the above.

Accepted Answer

C)$110,000 realized and $110,000 recognized gain.

Question 13

Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash.What is Bud's recognized gain or loss?
A)$0
B)$2,000
C)$6,000
D)$8,000
E)None of the above

Accepted Answer

The answer of Bud exchanges a business use machine with...

Question 14

Moss exchanges a warehouse for a building he will use as an office building.The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000.In addition, Moss receives cash of $150,000.What is the recognized gain or loss and the basis of the office building?
A)$0 and $350,000.
B)$0 and $450,000.
C)($150,000) and $300,000.
D)($200,000) and $350,000.
E)None of the above.

Accepted Answer

The answer of Moss exchanges a warehouse for a building...

Question 15

In October 2017, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange.Ben bought his real estate in 2006 while Jerry purchased his in 2009.In addition to the realty, Ben receives Pearl, Inc.stock worth $10,000 from Jerry.Ben's realized gain is $30,000.On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin?
A)2006, 2017.
B)2006, 2006.
C)2009, 2009.
D)2009, 2017.
E)None of the above.

Accepted Answer

The answer of In October 2017, Ben and Jerry exchange...

Question 16

In determining the basis of like-kind property received, postponed losses are:
A)Added to the basis of the old property.
B)Subtracted from the basis of the old property.
C)Added to the fair market value of the like-kind property received.
D)Subtracted from the fair market value of the like-kind property received.
E)None of the above.

Accepted Answer

Postponed losses are added to the fair market value of the like-kind property received to determine the basis of the new property. This adjustment ensures that the loss is not lost but deferred until the new property is disposed of.

Question 17

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion?
A)Al's business warehouse is destroyed by a tornado on October 31, 2017.Al is a calendar year taxpayer.He receives insurance proceeds on December 5, 2017.He reinvests the proceeds in another warehouse to be used in his business on December 29, 2019.
B)Heather's personal residence is destroyed by fire on October 31, 2017.She is a calendar year taxpayer.She receives insurance proceeds on December 5, 2017.She purchases another principal residence with the proceeds on October 31, 2019.
C)Mack's office building is condemned by the city as part of a road construction project.The date of the condemnation is October 31, 2017.He is a calendar year taxpayer.He receives condemnation proceeds from the city on that date.He purchases another office building with the proceeds on December 5, 2020.
D)Lizzy's business automobile is destroyed in an accident on October 31, 2017.Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th.She receives insurance proceeds on December 5, 2017.She purchases another business automobile with the proceeds on June 1, 2020.
E)All of the above.

Accepted Answer

Under § 1033 of the Internal Revenue Code, taxpayers are generally given a period of up to two years from the end of the tax year in which any gain is realized from an involuntary conversion to reinvest the proceeds and postpone the gain. For businesses and certain real properties used in a trade or business or held for investment, this period is extended to three years. Each scenario provided falls within these time frames, allowing for the postponement of gain recognition.

Question 18

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:
A)Recognized to the extent of the deficiency (amount realized not reinvested).
B)Recognized to the extent of realized gain.
C)Recognized to the extent of the amount reinvested in excess of the adjusted basis.
D)Permanently not subject to taxation.
E)None of the above.

Accepted Answer

When a taxpayer qualifies under §1033 for nonrecognition of gain from an involuntary conversion and reinvests less than the amount realized in replacement property, the taxpayer must recognize the realized gain to the extent of the deficiency (amount realized not reinvested). This is in accordance with §1033(c)(2)(A). Therefore, choice A is the correct answer.

Question 19

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1, 2018.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?
A)$0; $720,000.
B)$30,000; $750,000.
C)$30,000; $845,000.
D)$150,000; $750,000.
E)None of the above.

Accepted Answer

To calculate gain on receipt of the condemnation award, we need to compare the amount received with the adjusted basis of the property. In this case, the condemnation award of $875,000 is greater than the adjusted basis of $750,000, resulting in a gain of $125,000 ($875,000 - $750,000).

To defer gain recognition, Sam can use the rules of Section 1033 of the Internal Revenue Code. Under these rules, if Sam reinvests the entire condemnation award into a new property, he can defer gain recognition until he sells the new property. The basis of the new property will be the cost of the property minus the amount of the deferred gain.

In this case, Sam builds a new office building and pays $845,000 for it. Since he reinvested the entire condemnation award of $875,000, he can defer the entire gain of $125,000. Therefore, the basis of the new property is $750,000 ($845,000 - $95,000), which is the cost of the property minus the deferred gain.

Therefore, the recognized gain on receipt of the condemnation award is $30,000 ($125,000 - $95,000), and the basis for the new office building is $750,000. The correct choice is B.

Question 20

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000.What is the recognized gain or loss?
A)$0
B)$20,000
C)($20,000)
D)($25,000)
E)None of the above

Accepted Answer

In a like-kind exchange, the recognized gain is the lesser of the realized gain or the boot received. Since Maud is receiving $20,000 in cash (boot), but the fair market value of the property she is giving up is less than its adjusted basis (indicating a realized loss, not gain), there is no gain to recognize. Losses on like-kind exchanges are not recognized. Therefore, the recognized gain is $0.

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

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000.In addition, Pam receives $100,000 in cash.What is the recognized gain or loss and the basis of the investment land?

Melvin receives stock as a gift from his uncle.No gift tax is paid.The adjusted basis of the stock is $30,000 and the fair market value is $38,000.Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash.What is his recognized gain and the basis for the bonds?

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

Joyce, a farmer, has the following events occur during the tax year.Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion) ?

Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash.What is Bud's recognized gain or loss?

In determining the basis of like-kind property received, postponed losses are:

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion?

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) , makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000.What is the recognized gain or loss?