Question 1

The terms "realized gain" and "recognized gain" can be used interchangeably? they mean the same thing.

Accepted Answer

Realized gain refers to the increase in the value of an asset that has been sold or exchanged, while recognized gain refers to the portion of the realized gain that is subject to taxation. The two terms are related, but not interchangeable.

Question 2

The adjusted basis of an asset is the original cost (or basis) plus capital recoveries less capital additions.

Accepted Answer

The adjusted basis of an asset is the original cost (or basis) plus capital additions less capital recoveries (depreciation, amortization, depletion, and casualty losses).

Question 3

Nontaxable stock dividends result in no change to the total basis of the old and new stock, but the basis per share decreases.

Accepted Answer

Nontaxable stock dividends are essentially a distribution of additional shares, which do not result in any change to the total basis of the old and new stock. However, since the basis is now allocated over a larger number of shares, the basis per share decreases.

Question 4

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Accepted Answer

If the property is transferred to Alex by inheritance, his basis in the property will be its fair market value at the time of Stuart's death, which is $500,000. This means that if Alex were to sell the property later, he would only pay capital gains taxes on any amount above $500,000. On the other hand, if the property were transferred by gift, Alex would take over Stuart's adjusted basis of $190,000, and if he were to sell the property later, he would need to pay capital gains taxes on any amount over $190,000. Therefore, it is preferable for the transfer to be by inheritance rather than by gift.

Question 5

In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized gain, but receives a new basis if there is a realized loss.

Accepted Answer

In a nontaxable exchange, the basis of the replacement property is generally a carryover basis, meaning it takes on the basis of the property exchanged, regardless of whether there is a realized gain or loss. This is to ensure that the gain or loss is deferred until the replacement property is sold or disposed of in a taxable transaction.

Question 6

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 7

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

Accepted Answer

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that these exchanges do not result in an immediate realization of income or loss, allowing the taxpayer to maintain continuity in their investment without immediate tax consequences. The deferral is related to the continuity of investment, not a change in the substance or form of the taxpayer's economic position.

Question 8

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Accepted Answer

This statement is true according to the IRS rules on wash sales. The basis of property acquired in a wash sale is adjusted upward by the amount of the disallowed loss, which is added to the cost of the replacement shares. This ensures that the investor does not recognize a loss on the sale and then immediately repurchasing the same security at a lower price.

Question 9

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

Accepted Answer

Wash sale rules apply to losses, not gains. Engaging in wash sales before the end of the tax year can help realize gains without triggering the wash sale rule.

Question 10

A loss from the sale of a personal use asset that would be disallowed cannot be recognized even if the taxpayer converts the asset to business use prior to its sale.

Accepted Answer

The tax code disallows recognition of losses from the sale of personal use assets, regardless of whether they were converted to business use prior to the sale.

Question 11

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

Accepted Answer

In a nontaxable exchange, recognition of gain or loss is postponed until a later taxable event, such as the sale of the asset received in the exchange. In a tax-free transaction, nonrecognition of gain or loss is permanent, meaning the basis of the asset received is the same as the basis of the asset given up.

Question 12

Gene purchased an SUV for $45,000 which he uses 100% for personal purposes. When the SUV is worth $30,000, he contributes it to his business. The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.

Accepted Answer

The loss basis should be the lower of the cost basis or the fair market value at the time of contribution, which in this case is $30,000. Therefore, the loss basis is $30,000, not $45,000.

Question 13

In general, the amount realized from a sale of property does not include any liability assumed by the buyer.

Accepted Answer

The amount realized from a sale of property generally includes the money received plus the fair market value of any property received, as well as any liability assumed by the buyer.

Question 14

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

Accepted Answer

Broker's commissions, legal fees, and points are all costs associated with the sale of the property and are typically paid by the seller. These costs are subtracted from the sale price to determine the seller's amount realized from the transaction.

Question 15

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 tax code to prevent taxpayers from creating artificial losses by selling and repurchasing the same or substantially identical stock within a short period of time.

Question 16

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000. Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000. Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Accepted Answer

Ben's recognized loss would be $10,000 ($25,000 adjusted basis - $15,000 selling price to Ray). However, this loss is disallowed under the related party rules since he sold the stock to his son. Therefore, his recognized loss is actually $0. Trish's recognized gain would be $11,000 ($26,000 selling price - $15,000 fair market value when received), not $1,000.

Question 17

If property that has been converted from personal use to business use has appreciated in value, its basis for gain will be the same as the basis for loss.

Accepted Answer

According to the IRS, if property has been converted from personal use to business use and has appreciated in value, the basis for gain will generally be the same as the basis for loss. This means that the property's current fair market value is not taken into account when calculating the gain or loss on the property. Instead, the original cost or other basis of the property is used to determine the gain or loss.

Question 18

The wash sales rules apply to both gains and losses.

Accepted Answer

The wash sale rule specifically applies to losses, not gains. It prevents taxpayers from claiming a tax deduction for a security sold in a wash sale.

Question 19

The basis of property acquired in a bargain purchase is its cost.

Accepted Answer

The basis of property acquired in a bargain purchase is the fair market value of the property, not its cost.

Question 20

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.

Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges