Question 1

Which of the following statements about the transfer of debt in a like-kind exchange is false?

Accepted Answer

The answer of Which of the following statements about the...

Question 2

Mr. and Mrs. Eyre own residential rental property that they would like to dispose of in a nontaxable exchange. Which of the following would not qualify as like-kind property?

Accepted Answer

All of the options mentioned (commercial office building, undeveloped land, warehouse used to store transportation equipment) qualify as like-kind property for a nontaxable exchange. Like-kind property refers to the nature or character of the property rather than its quality or grade.

Question 3

In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture.

Accepted Answer

The recognized loss on involuntary conversion is the adjusted tax basis minus the reimbursement received minus any additional costs incurred in replacing the lost property. 
$17,040 - $15,000 - $16,000 = $2,040 recognized loss
The tax basis in the new furniture is the cost of replacement, which is $16,000.

Question 4

Grantly Seafood is a calendar year taxpayer. In 2016, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2016, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2017, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

Accepted Answer

Grantly's recognized gain is the insurance reimbursement ($1,000,000) minus the adjusted tax basis of the destroyed boats ($784,500), resulting in a $215,500 gain. The basis in the new boat is its purchase price, $750,000.

Question 5

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Perry } & \text { Dally } \
\text { FMV } & \mathbf { \$ 5 0 0 , 0 0 0 } & \mathbf { \$ 5 3 0 , 0 0 0 } \
\text { Adjusted tax basis } & \mathbf { 4 1 0 , 0 0 0 } & \mathbf { 2 8 3 , 0 0 0 } \
\text { Mortgage } & \mathbf { 7 0 , 0 0 0 } & \mathbf { 1 0 0 , 0 0 0 }
\end{array}$$ Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Perry's gain recognized on the exchange and its tax basis in the property received from Dally.

Accepted Answer

Perry's gain recognized is zero because the exchange qualifies as a like-kind exchange under IRS rules, which allows deferral of gain recognition. The basis in the Dally property is calculated as Perry's original basis ($410,000) plus the net mortgage relief ($30,000), resulting in a $440,000 basis.

Question 6

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Babex } & O M G \
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & \mathbf { 7 6 8 , 0 0 0 } & \mathbf { 5 1 4 , 5 0 0 } \
\text { Mortgage } & \mathbf { 1 7 5 , 0 0 0 } & - \mathbf { 0 } -
\end{array}$$ Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

Accepted Answer

Babex recognizes a gain of $175,000 due to the mortgage relief. The basis in the OMG property is the adjusted basis of the Babex property ($768,000) plus the gain recognized ($175,000) minus the mortgage assumed ($175,000), resulting in a basis of $768,000.

Question 7

In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the new signage.

Accepted Answer

The answer of In April, vandals completely destroyed outdoor signage...

Question 8

Thieves stole computer equipment used by Ms. James in her small business. Ms. James' tax basis in the equipment was zero. One month after the theft, she received a $17,600 reimbursement from her casualty insurance company and used $14,850 to replace the computer equipment. She used the $2,750 remaining reimbursement to purchase a new desk for her office. Which of the following statements is false?

Accepted Answer

The answer of Thieves stole computer equipment used by Ms....

Question 9

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Babex } & O M G \
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & \mathbf { 7 6 8 , 0 0 0 } & \mathbf { 5 1 4 , 5 0 0 } \
\text { Mortgage } & \mathbf { 1 7 5 , 0 0 0 } & - \mathbf { 0 } -
\end{array}$$ Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

Accepted Answer

OMG recognizes no gain because the exchange qualifies as a like-kind exchange under IRC Section 1031. The basis in the property received is the adjusted basis of the property given up ($514,500) plus any gain recognized (none) minus any money received (none) plus any liabilities assumed ($175,000), resulting in a basis of $689,500.

Question 10

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Johnson } & C \& K \
\text { FMV } & \$ 900,000 & \$ 675,000 \
\text { Adjusted tax basis } & \mathbf { 5 9 3 , 0 0 0 } & 462,000 \
\text { Mortgage } & \mathbf { 2 0 0 , 0 0 0 } & - 0 \text { - }
\end{array}$$ Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the property received from Johnson.

Accepted Answer

The answer of Johnson Inc. and C&K Company entered into...

Question 11

Tauber Inc. and J&I Company exchanged like-kind production assets. Tauber's asset had a $17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000 adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the following statements is false?

Accepted Answer

The answer of Tauber Inc. and J&I Company exchanged like-kind...

Question 12

Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true?

Accepted Answer

Boot refers to the excess value of one property over the other property in an exchange. In this case, Mr. Weller's property had a mortgage of $428,000, while Olson's property had a mortgage of $235,000. Therefore, Mr. Weller received $193,000 in boot (the difference between the mortgages), while Olson paid $193,000 in boot.

Question 13

Acme Inc. and Beamer Company exchanged like-kind production assets. Acme's asset had a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange. Which of the following statements is true?

Accepted Answer

The answer of Acme Inc. and Beamer Company exchanged like-kind...

Question 14

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Johnson } & \text { CdK } \
\text { FMV } & \$ 900,000 & \$ 675,000 \
\text { Adjusted tax basis } & \mathbf { 5 9 3 , 0 0 0 } & \mathbf { 4 6 2 , 0 0 0 } \
\text { Mortgage } & \mathbf { 2 0 0 , 0 0 0 } & - 0 -
\end{array}$$ Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Accepted Answer

Johnson's gain recognized is $225,000, which is the sum of the cash received ($25,000) and the mortgage assumed by C&K ($200,000). The basis in the C&K property is Johnson's original basis ($593,000) plus the gain recognized ($225,000) minus the cash received ($25,000), resulting in a basis of $793,000. However, the correct basis calculation should be $593,000, as the gain recognized does not affect the basis in this context.

Question 15

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Perry } & \text { Dally } \
\text { FMV } & \mathbf { \$ 5 0 0 , 0 0 0 } & \mathbf { \$ 5 3 0 , 0 0 0 } \
\text { Adjusted tax basis } & \mathbf { 4 1 0 , 0 0 0 } & \mathbf { 2 8 3 , 0 0 0 } \
\text { Mortgage } & \mathbf { 7 0 , 0 0 0 } & \mathbf { 1 0 0 , 0 0 0 }
\end{array}$$ Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Accepted Answer

To calculate Dally's gain recognized, we first need to calculate the realized gain on the exchange. Dally received property with a FMV of $530,000 but with a tax basis of only $283,000. This means that Dally realized a gain of $247,000 ($530,000 - $283,000). However, Dally also assumed a mortgage with a balance of $100,000. This reduces the amount of gain recognized to $147,000 ($247,000 - $100,000).

Dally's tax basis in the property received will be the adjusted tax basis of the Perry property ($410,000) plus the gain recognized ($147,000), minus the mortgage assumed ($70,000). This gives a tax basis in the property received of $487,000 ($410,000 + $147,000 - $70,000).

Therefore, the correct choice is C, $30,000 gain recognized; $283,000 basis in the Perry property.

Question 16

Grantly Seafood is a calendar year taxpayer. In 2016, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2016, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

Accepted Answer

The answer of Grantly Seafood is a calendar year taxpayer....

Question 17

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

Accepted Answer

The answer of Nixon Inc. transferred Asset A to an...

Question 18

Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?

Accepted Answer

A like-kind exchange, under Section 1031 of the Internal Revenue Code, allows for the exchange of real property used for business or investment purposes for another real property of like-kind. In this case, an office building (real property) is considered like-kind to farm land (also real property), whereas tractors and hogs are personal property, and a personal residence does not qualify for like-kind exchange treatment because it is not used for business or investment purposes.

Question 19

Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a nontaxable exchange. Which of the following would qualify as like-kind property?

Accepted Answer

Like-kind property for passenger automobiles would be other passenger automobiles, such as sports utility vehicles. Dump trucks and double decker buses would not be considered like-kind property because they serve a different purpose and are not similar in nature or character to passenger automobiles.

Question 20

In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its property insurance company, and on September 8, it purchased one new delivery van for $70,000. Compute Totle's recognized gain on loss on the involuntary conversion and its tax basis in the new van.

Accepted Answer

Totle's recognized gain on the involuntary conversion is the excess of the reimbursement ($90,000) over the adjusted tax basis in the vans ($48,900), which is $41,100. Since Totle only used $70,000 of the reimbursement to purchase the new van, it did not fully replace the lost vans. Therefore, Totle has a recognized gain of $20,000 ($41,100 - $21,100). 
The tax basis in the new van is the cost of the new van ($70,000) plus the recognized gain ($20,000), which is $90,000. However, since Totle only used $70,000 of the insurance reimbursement to purchase the new van, the remaining $20,000 is treated as taxable income. Therefore, Totle's tax basis in the new van is $70,000.

Quiz 9: Nontaxable Exchanges