Question 1

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory?
I.Involuntary conversion of business real estate.
II.Like-kind exchange of business real estate.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Gain deferral is fundamental to the nonrecognition...

Question 2

Rationale for nonrecognition of property transactions exists because of which concept(s)of taxation?
I.Wherewithal-to-Pay Concept.
II.Constructive receipt Doctrine.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The concept of nonrecognition of property transactions is mainly driven by the Wherewithal-to-Pay Concept of taxation. It means that the taxpayer should not be taxed on unrealized gains since they do not have the means to pay for the taxes. The Constructive Receipt Doctrine, on the other hand, applies to the timing of income recognition and does not directly relate to property transactions.

Question 3

Under the like-kind exchange rules,when like-kind property is traded for like-kind property,a loss on a trade-in is:
A)recognized and treated as a capital loss.
B)recognized and treated as an ordinary loss.
C)not recognized and increases the basis of the replacement property.
D)not recognized and decreases the basis of the replacement property.
E)none of the above.

Accepted Answer

Under the like-kind exchange rules, a loss on a trade-in is not recognized and increases the basis of the replacement property. This is known as the basis adjustment rule.

Question 4

Willie owns 115 acres of land with a fair market value of $57,000.He purchased the land as an investment for $35,000 in 1993.Willie trades the land for a 122-acre parcel adjacent to other property he owns.The 122 acres has a value of $57,000,and the exchange qualifies for like-kind deferral treatment.What is Willie's basis in the new parcel of land?
A)$ - 0 -
B)$17,000
C)$35,000
D)$57,000
E)$74,000

Accepted Answer

Willie's basis in the new parcel of land will be the same as his basis in the old land, which is $35,000. Since the exchange qualifies for like-kind deferral treatment, Willie will not have to pay taxes on the gain in value of the old land. Therefore, his basis in the new land is still $35,000.

Question 5

A fire destroyed Jimmy's Teeshirt Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire.Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds.
I.Jimmy has a realized gain of $50,000.
II.Jimmy has a recognized gain of $50,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Jimmy has a realized gain of $50,000 because the insurance proceeds of $550,000 exceed the adjusted basis of $500,000. However, if he reinvests the insurance proceeds in a similar property (a new Teeshirt Shop), he may not have to recognize this gain for tax purposes, depending on specific tax regulations.

Question 6

The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the basis of the replacement property.These adjustments include
I.subtracting deferred losses.
II.adding deferred gains.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of The general mechanism used to defer gains...

Question 7

Karen owns a commercial office building with a fair market value of $140,000.She purchased the building as an investment for $102,000 in 2003.She has claimed $18,000 in depreciation deductions.Karen trades the building for an apartment complex.The apartment complex has a value of $140,000,and the exchange qualifies for like-kind deferral treatment.What is Karen's basis in the apartment complex?
A)$ - 0 -
B)$ 58,000
C)$ 84,000
D)$140,000
E)$198,000

Accepted Answer

Karen's basis in the commercial office building is calculated as follows:
Purchase price: $102,000
Add: Closing costs and improvements: $0 (not provided in the question)
Minus: Accumulated depreciation: $18,000
= Adjusted basis: $84,000

When Karen trades the building for the apartment complex, the like-kind exchange rule applies and she can defer recognizing any gain or loss on the transaction. Therefore, her adjusted basis in the apartment complex will be the same as her adjusted basis in the office building at the time of the exchange, which is $84,000. Thus, the answer is C.

Question 8

Fran owns a commercial office building with a fair market value of $850,000.She purchased the building as an investment for $815,000 in 2006.She has deducted $115,000 in depreciation.Fran trades the building for an apartment complex.The apartment complex has a value of $850,000,and the exchange qualifies for like-kind deferral treatment.What is Fran's recognized gain on the exchange?
A)$ - 0 -
B)$ 35,000
C)$115,000
D)$150,000
E)$850,000

Accepted Answer

Since the exchange qualifies for like-kind deferral treatment, Fran's recognized gain on the exchange is $0. The fair market value of the building she traded for ($850,000) is equal to the fair market value of her own building ($850,000), so no taxable gain is recognized.

Question 9

Which of the following qualifies as a like-kind exchange of property?
I.Inventory for inventory.
II.Office equipment for a delivery van.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Like-kind exchanges, also known as 1031 exchanges, apply only to real estate property. Neither inventory nor office equipment and delivery vans qualify for this type of exchange. Therefore, both statement I and II are incorrect.

Question 10

Which of the following exchanges of property are like-kind exchanges?
I.Common stock of Intel traded for preferred stock of Intel.
II.Principal residence traded for 20 acres of undeveloped investment land.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Like-kind exchanges under U.S. tax law typically involve real property used for business or investment purposes. Common stock for preferred stock is not considered like-kind because they are both securities, not real property. A principal residence for investment land is also not like-kind because the properties have different uses (personal vs. investment).

Question 11

Rationale for nonrecognition includes which of the following?
I.A refinement of the realization concept,which postpones recognition of appreciation in value until the taxpayer disposes of a property,or its replacement.
II.Under the Substance-over-form doctrine,new property acquired in a transaction is viewed as a continuation of the original investment.
III.The taxpayer lacks wherewithal to pay the tax on a realized gain because the amount realized on the transaction is reinvested in the replacement asset.
A)Only II is correct.
B)Only I is correct.
C)II and III are correct.
D)I, II, and III are correct.
E)Only III is correct.

Accepted Answer

The rationale for nonrecognition includes all three reasons provided: I) It is a refinement of the realization concept, which postpones recognition of appreciation in value until disposal of the property or its replacement. II) Under the Substance-over-form doctrine, new property acquired in a transaction is viewed as a continuation of the original investment, and III) The taxpayer may lack the wherewithal to pay the tax on a realized gain because the amount realized on the transaction is reinvested in the replacement asset.

Question 12

Wendell owns 115 acres of land with a fair market value of $57,000.He purchased the land as an investment for $35,000 in 1993.Wendell trades the land for a 122-acre parcel adjacent to other property he owns.The 122 acres has a value of $57,000,and the exchange qualifies for like-kind deferral treatment.What is Wendell's recognized gain on the exchange?
A)$ - 0 -
B)$22,000
C)$35,000
D)$57,000
E)$79,000

Accepted Answer

Wendell's recognized gain on the exchange is $0. Because the exchange qualifies for like-kind deferral treatment, Wendell does not need to recognize any gain or loss on the exchange. The value of the new property received ($57,000) is equal to the fair market value of the property given up ($57,000), and Wendell's basis in the new property will be the same as his basis in the property given up, which is $35,000.

Question 13

For a transaction to qualify as a third-party exchange,
I.The exchange must be completed within 1 year of the first exchange.
II.The property exchanged must be identified within 45 days of the first exchange.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The correct statement regarding a third-party exchange, often referred to in the context of a 1031 exchange in the United States tax code, is that the property to be exchanged must be identified within 45 days of the first exchange. The requirement to complete the exchange within 1 year is not accurate; instead, the exchange must generally be completed within 180 days.

Question 14

Commonalties of nonrecognition transactions include that
I.deferring a loss is mandatory on like-kind exchanges.
II.deferring a loss is mandatory on involuntary conversions.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Commonalties of nonrecognition transactions include that
I.deferring a...

Question 15

Commonalties of nonrecognition transactions include that
I.gains on all transactions must be recognized when the taxpayer has the wherewithal-to-pay.
II.tax attributes carryover from the original asset to the replacement asset.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Commonalties of nonrecognition transactions include that
I.gains on...

Question 16

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh has a recognized gain of $50,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is incorrect because a realized gain is the difference between the amount realized from the sale or disposition of property and its adjusted basis. In this case, the amount realized is $550,000 (received from the insurance company) and the adjusted basis is $500,000, which results in a realized gain of $50,000 ($550,000 - $500,000). 
Statement II is correct because a recognized gain is the gain that is subject to taxation. In this case, since Josh received $550,000 from the insurance company, he recognized a gain of $50,000 ($550,000 - $500,000).

Question 17

Which of the tax concept(s)allow for the deferral of gains on nonrecognition transactions?
I.Capital Recovery Concept.
II.Ability to Pay Concept.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The concepts allowing for the deferral of gains on nonrecognition transactions are not the Capital Recovery Concept or the Ability to Pay Concept. These concepts relate to different principles in taxation, not specifically to the deferral of gains on nonrecognition transactions.

Question 18

Randy owns 115 acres of land with a fair market value of $57,000.He purchased the land as an investment for $35,000 in 1993.Randy trades the land for a 122-acre parcel adjacent to other property he owns.The 122 acres has a value of $57,000,and the exchange qualifies for like-kind deferral treatment.What is Randy's realized gain on the exchange?
A)$ - 0 -
B)$22,000
C)$35,000
D)$57,000
E)$79,000

Accepted Answer

To calculate Randy's realized gain on the exchange, we need to determine the adjusted basis of the land he traded away. The adjusted basis is the original purchase price of $35,000 plus any improvements made to the property over time. Since no improvements were mentioned, we can assume the adjusted basis is still $35,000.

Next, we need to compare the fair market value of the land Randy traded away to the fair market value of the land he received. The land he traded away had a fair market value of $57,000, while the land he received also has a fair market value of $57,000.

Since Randy's exchange qualifies for like-kind deferral treatment, he does not have to recognize any gain on the exchange. However, his adjusted basis in the 122-acre parcel he received will be $35,000 (the adjusted basis of the land he traded away). Thus, if Randy were to eventually sell the new parcel of land for its fair market value of $57,000, he would have a realized gain of $22,000 ($57,000 - $35,000).

Question 19

The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the fair market value of the replacement property.These adjustments include
I.adding boot received.
II.subtracting deferred gains.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of The general mechanism used to defer gains...

Question 20

Which of the following qualifies as a like-kind exchange of property?
I.Commercial retail building and its land for an office building and its land.
II.Louisiana Oil,Inc.common stock for Louisiana Oil,Inc.corporate bonds.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I qualifies as a like-kind exchange because it involves the exchange of real property for real property. Statement II does not qualify as a like-kind exchange because it involves the exchange of stock for bonds, which are not considered like-kind property.

Quiz 12: Nonrecognition Transactions

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate.

Rationale for nonrecognition of property transactions exists because of which concept(s) of taxation? I.Wherewithal-to-Pay Concept. II.Constructive receipt Doctrine.

Under the like-kind exchange rules,when like-kind property is traded for like-kind property,a loss on a trade-in is:

The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the basis of the replacement property.These adjustments include I.subtracting deferred losses. II.adding deferred gains.

Which of the following qualifies as a like-kind exchange of property? I.Inventory for inventory. II.Office equipment for a delivery van.

Which of the following exchanges of property are like-kind exchanges? I.Common stock of Intel traded for preferred stock of Intel. II.Principal residence traded for 20 acres of undeveloped investment land.

For a transaction to qualify as a third-party exchange, I.The exchange must be completed within 1 year of the first exchange. II.The property exchanged must be identified within 45 days of the first exchange.

Commonalties of nonrecognition transactions include that I.deferring a loss is mandatory on like-kind exchanges. II.deferring a loss is mandatory on involuntary conversions.

Commonalties of nonrecognition transactions include that I.gains on all transactions must be recognized when the taxpayer has the wherewithal-to-pay. II.tax attributes carryover from the original asset to the replacement asset.

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000.

Which of the tax concept(s) allow for the deferral of gains on nonrecognition transactions? I.Capital Recovery Concept. II.Ability to Pay Concept.

The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the fair market value of the replacement property.These adjustments include I.adding boot received. II.subtracting deferred gains.

Which of the following qualifies as a like-kind exchange of property? I.Commercial retail building and its land for an office building and its land. II.Louisiana Oil,Inc.common stock for Louisiana Oil,Inc.corporate bonds.