Question 1

The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000.If the stock or cash is going to be given to her niece,it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece.The same preference would exist if the recipient were a qualified charitable organization.

Accepted Answer

Selling the stock for its fair market value of $8,000 would generate a $7,000 capital loss, which can be used to offset other capital gains, up to $3,000 of ordinary income, and carried forward to future tax years. Donating the cash or the stock to a qualified charitable organization would also result in a charitable contribution deduction, but selling the stock and donating the cash would allow the taxpayer to maximize both the capital loss and the charitable contribution deduction.

Question 2

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the form but not the substance of the taxpayer's relative economic position.

Accepted Answer

This statement is true. The gain or loss is deferred because there has not been an actual realization of gain or loss due to the exchange being nontaxable. The taxpayer's economic position has essentially remained the same, just in a different form.

Question 3

The exchange of unimproved real property located in Topeka (KS)for improved real property located in Atlanta (GA)qualifies as a like-kind exchange.

Accepted Answer

The exchange of unimproved real property for improved real property can still qualify as a like-kind exchange as long as both properties are used for investment or business purposes. The fact that they are located in different states (Topeka, KS and Atlanta, GA) does not affect their eligibility for like-kind exchange treatment.

Question 4

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

Accepted Answer

In a nontaxable exchange, the recognition of gains or losses is postponed but may eventually arise in the future when the new asset is sold. In a tax-free transaction, the nonrecognition of gains or losses is permanent, meaning that the basis of the new asset is adjusted to the basis of the old asset and no taxable gain or loss is ever recognized.

Question 5

One of the justifications for nontaxable exchange treatment is that the taxpayer lacks the wherewithal to pay.

Accepted Answer

The concept of "lack of wherewithal to pay" is a justification for nontaxable exchanges, as it recognizes that the taxpayer does not have the liquid assets to pay taxes on the exchange.

Question 6

The basis of property acquired in a wash sale is its cost plus the loss recognized on the wash sale.

Accepted Answer

The basis of property acquired in a wash sale is its cost, not cost plus the loss recognized on the wash sale. The loss recognized is disallowed and added to the cost basis of the new property.

Question 7

Ben sells stock (adjusted basis of $14,000)to his son,Ray,for its fair market value of $9,500.Ray gives the stock to his daughter,Trish,who subsequently sells it for $13,500.Ben's recognized loss is $0 and Trish's recognized gain is $0 ($13,500 - $9,500 - $4,000).

Accepted Answer

Ben's recognized loss is disallowed due to the related party transaction rules, but Trish's recognized gain should be calculated based on her adjusted basis, which is Ray's purchase price of $9,500, resulting in a gain of $4,000 ($13,500 - $9,500).

Question 8

Livestock of different sexes cannot qualify for like-kind exchange treatment even if the livestock has been held for over one year.

Accepted Answer

Livestock of different sexes are considered to be of different "classifications" and therefore cannot be exchanged under like-kind exchange rules, even if they have been held for over one year.

Question 9

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange,the taxpayer acquires substantially identical stock.

Accepted Answer

This is known as the "wash sale rule" and is a provision in the U.S. tax code. It is designed to prevent investors from selling stock at a loss for tax purposes, but then buying it back shortly thereafter in order to maintain their position in the market. If the "substantially identical" stock is repurchased within the 30-day timeframe, then the loss from the original sale is disallowed for tax purposes.

Question 10

The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

Accepted Answer

The answer of The basis for gain and loss of...

Question 11

Broker's commissions and points paid by the seller reduce the seller's amount realized.

Accepted Answer

Broker's commissions and points paid by the seller are deducted from the seller's proceeds, thus reducing the amount they receive from the sale.

Question 12

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 Section 1031 of the Internal Revenue Code, real property must be exchanged for other real property of a like kind, which can be used for business or investment purposes. Personal property no longer qualifies for like-kind exchanges after the Tax Cuts and Jobs Act of 2017.

Question 13

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, properties involved in a like-kind exchange must be located within the United States to qualify for like-kind exchange treatment.

Question 14

Property that has been converted from personal use to business or income-producing use will be dual basis property if the adjusted basis exceeds the fair market value at the date of conversion.

Accepted Answer

When property is converted from personal use to business use, it becomes dual basis property if its adjusted basis is higher than its fair market value at the time of conversion. This means it has one basis for determining loss and another for determining gain.

Question 15

Jena owns land as an investor.She exchanges the land for a warehouse in which she will store the inventory of her business.The exchange does not qualify for like-kind exchange treatment.

Accepted Answer

The answer of Jena owns land as an investor.She exchanges...

Question 16

In a nontaxable exchange,the replacement property is assigned a carryover basis.

Accepted Answer

In a nontaxable exchange, the basis of the replacement property is generally equal to the adjusted basis of the property given up in the exchange, which is referred to as a carryover basis.

Question 17

A loss from the sale of a personal use asset that would be disallowed can be recognized if the taxpayer converts the asset to business use prior to its sale.

Accepted Answer

A loss from the sale of a personal use asset is generally disallowed, even if the asset is converted to business use prior to its sale. The loss is not recognized because the asset's basis for loss purposes is the lower of its adjusted basis or fair market value at the time of conversion.

Question 18

Stocks and bonds held for investment purposes qualify under the like-kind exchange provision.

Accepted Answer

Like-kind exchanges only apply to real estate property used for business or investment purposes. Stocks and bonds are not considered like-kind property and, therefore, do not qualify for a like-kind exchange provision.

Question 19

The taxpayer owns land with an adjusted basis of $20,000 and a fair market value of $50,000.If the property is going to be given to the taxpayer's nephew,it is preferable for the transfer to be by inheritance rather than by gift.

Accepted Answer

If the property is transferred by inheritance, the nephew will receive a stepped-up basis equal to the fair market value at the time of the taxpayer's death. This means that if the nephew sells the property after inheriting it, he will only owe capital gains taxes on any increase in value above the stepped-up basis. However, if the property is transferred by gift, the nephew will receive the taxpayer's carryover basis of $20,000. This could result in a much larger tax bill if the nephew sells the property in the future.

Question 20

A taxpayer can recognize a realized loss on a § 1031 like-kind exchange.

Accepted Answer

A taxpayer cannot recognize a loss on a § 1031 like-kind exchange. Any loss is considered to be deferred and carried over to the replacement property.

Quiz 13: Part 1--Property Transactions: Determination of Gain or Loss,basis Considerations,and Nontaxable Exchanges