Question 1

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 2

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

In a § 1031 like-kind exchange, the holding period for the like-kind property received tacks onto the holding period of the property exchanged (it does not begin anew on the date of the exchange), while the holding period for the boot received begins on the date of the exchange.

Question 3

If a taxpayer exchanges like-kind property and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction.

Accepted Answer

The answer of If a taxpayer exchanges like-kind property and...

Question 4

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 5

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

The exchange does not qualify as a like-kind exchange because the assets being exchanged are not like-kind. Therefore, Cole must recognize the entire gain of $10,000 ($25,000 - $15,000) and his basis in the new asset is $19,000. The $6,000 cash received is also taxable.

Question 6

Kendra owns a home in Atlanta.Her company transfers her to Chicago on January 2, 2019, and she sells the Atlanta house in early February 2019.She purchases a residence in Chicago on February 3, 2019.On December 15, 2019, Kendra's company transfers her to Los Angeles.In January 2020, she sells the Chicago residence and purchases a residence in Los Angeles.Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home.

Accepted Answer

Section 121 of the Internal Revenue Code allows for the exclusion of gain from the sale of a principal residence if the homeowner has owned and used the home as their principal residence for at least two out of the five years prior to the sale. The law does not prevent the exclusion from applying to multiple sales within a two-year period, as long as each sale meets the eligibility criteria independently.

Question 7

Bria'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, Bria receives insurance proceeds of $192,500 two months after the date of the loss.One month later, Bria uses the insurance proceeds to purchase a new office building for $275,000.Her adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Accepted Answer

The adjusted basis for the new building would be $275,000 (cost) + $22,500 (postponed loss) = $297,500. This is because the postponed loss is calculated by taking the fair market value ($275,000) minus the insurance proceeds received ($192,500), which equals $82,500. The 30% co-insurance clause means that Bria was only insured for 70% of the building's value, so the full value of the building was $82,500 / 0.7 = $117,857.14. This means the postponed loss is $275,000 - $117,857.14 = $157,142.86. Adding this to the cost of the new building gives $275,000 + $157,142.86 = $432,142.86, which is incorrect.

Question 8

Wyatt sells his principal residence in December 2019 and qualifies for the § 121 exclusion.He sells another principal residence in November 2020.Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Accepted Answer

Although Wyatt cannot claim the § 121 exclusion on the second residence sold in November 2020 if he has taken advantage of it in December 2019, there are certain exceptions to this rule. For example, if Wyatt sold the second residence because of unforeseen circumstances such as a change in employment, health problems, or a divorce, he may be eligible for a reduced exclusion amount. Therefore, the statement that Wyatt cannot qualify for the § 121 exclusion on the sale of the second residence under no circumstance is false.

Question 9

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Accepted Answer

The statement is true. The amount realized for tax purposes does not include any amount designated as severance damages.

Question 10

Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

Accepted Answer

Section 1033 primarily addresses the nonrecognition of gain for tax purposes when property is involuntarily converted to cash or a similar form, and does not specifically apply to losses.

Question 11

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

Accepted Answer

To qualify for the § 121 exclusion, the property must have been owned and used as the taxpayer's principal residence for at least two of the five years preceding the date of sale, not for the entire five-year period.

Question 12

Milt's building, which houses his retail sporting goods store, is destroyed by a flood.Sandra's warehouse, which she is leasing to Milt to store the inventory of his business, also is destroyed in the same flood.Both Milt and Sandra receive insurance proceeds that result in a realized gain.Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Accepted Answer

The answer of Milt's building, which houses his retail sporting...

Question 13

Terry exchanges real estate (acquired on August 25, 2013) held for investment for other real estate to be held for investment on September 1, 2019.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, 2013.

Accepted Answer

According to the information given, none of the realized gain is recognized and the adjusted basis for the new real estate is a carryover basis of $80,000. Therefore, Terry's holding period for the new real estate begins on the date of acquisition of the original real estate, which is August 25, 2013.

Question 14

If a taxpayer reinvests the net proceeds (amount received minus related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain.

Accepted Answer

This statement is true according to the rules of deferring gain recognition in an involuntary conversion under Section 1033 of the Internal Revenue Code. If the taxpayer reinvests the net proceeds in qualified replacement property within the specified time frame, they can defer the recognition of the realized gain.

Question 15

If an election to postpone gain under § 1033 is made, the holding period of replacement property includes the holding period of the involuntarily converted property.

Accepted Answer

According to the IRS, "If an election is made to postpone gain under § 1033, the holding period of replacement property includes the holding period of the involuntarily converted property." (source: https://www.irs.gov/publications/p544#en_US_2019_publink100072556)

Question 16

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Accepted Answer

This is the definition of an involuntary conversion according to the Internal Revenue Service.

Question 17

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

When a taxpayer surrenders a depreciated boot (property with a fair market value less than its adjusted basis) in a like-kind exchange, they may have to recognize a loss equal to the difference between the adjusted basis of the boot and its fair market value. This loss is not deductible, but it reduces the taxpayer's basis in the replacement property acquired in the exchange.

Question 18

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain).

Accepted Answer

The basis of the replacement property will be its cost minus any deferred gain from the involuntary conversion, not more than its cost. If the recognized gain equals the realized gain due to a reinvestment deficiency, it means there's no deferred gain to adjust the basis upwards.

Question 19

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, unless it is a business or rental property.

Question 20

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) that is destroyed by a tornado in October 2019.He receives insurance proceeds of $250,000 in January 2020.If before 2022, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

Accepted Answer

This statement is true according to the rules of Section 1033 of the Internal Revenue Code. If Dennis replaces the warehouse with a new one that costs at least as much as the insurance proceeds he received, he can defer recognition of any realized gain until he sells or otherwise disposes of the new property.

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