Question 1

In October 2016, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2006 while Jerry purchased his in 2009. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben's realized gain is $30,000. On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin?

Accepted Answer

The answer of In October 2016, Ben and Jerry exchange...

Question 2

Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonya's realized and recognized gain?

Accepted Answer

The answer of Nancy and Tonya exchanged assets. Nancy gave...

Question 3

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 their principal residence, as it is considered a personal asset. Only gains can be recognized and may be subject to certain exclusions and limitations.

Question 4

Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds?

Accepted Answer

The answer of Melvin receives stock as a gift from...

Question 5

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of gain should Paula recognize?

Accepted Answer

The answer of On October 1, Paula exchanged an apartment...

Question 6

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

Accepted Answer

The answer of To qualify for the § 121 exclusion,...

Question 7

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

Accepted Answer

When a taxpayer exchanges assets in a like-kind exchange, they do not realize a gain or loss at the time of the exchange. Instead, the adjusted basis of the old property carries over to the new property received. Therefore, Lily's recognized gain is $0 and her basis for the building received is $120,000.

Question 8

Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (fair market value of $93,000) to be used in her business in a like-kind exchange. What is Molly's recognized gain or loss?

Accepted Answer

The answer of Molly exchanges a small machine (adjusted basis...

Question 9

Wyatt sells his principal residence in December 2016 and qualifies for the § 121 exclusion. He sells another principal residence in November 2017. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Accepted Answer

While the § 121 exclusion requires that the taxpayer not have excluded gain from the sale of another principal residence within the past two years, Wyatt would be eligible for the exclusion on the sale of his second residence as long as he meets all other eligibility requirements, including owning and using the property as his principal residence for at least two of the five years before the sale.

Question 10

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 11

Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash. What is Bud's recognized gain or loss?

Accepted Answer

The answer of Bud exchanges a business use machine with...

Question 12

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss?

Accepted Answer

The answer of Maud exchanges a rental house at the...

Question 13

Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?

Accepted Answer

Only event C qualifies as an involuntary conversion under § 1033 since it involves the condemnation (forced sale) of her personal residence. Events A and D are not involuntary conversions since they involve voluntary sales of property. Event B is also not an involuntary conversion since it involves the voluntary sale of land for a loss due to retirement planning.

Question 14

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land?

Accepted Answer

Pam exchanged a rental building with an adjusted basis of $520,000 for investment land with a fair market value of $700,000, which means she recognized a gain of $180,000 ($700,000 - $520,000). However, because this is a like-kind exchange, the gain is deferred and not recognized immediately. The basis of the investment land is equal to the adjusted basis of the rental building ($520,000) plus any additional cash paid ($100,000), for a total basis of $620,000. Therefore, the recognized gain is $100,000 ($620,000 - $520,000) and the basis of the investment land is $620,000.

Question 15

In determining the basis of like-kind property received, postponed losses are:

Accepted Answer

The answer of In determining the basis of like-kind property...

Question 16

Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena's mortgage on the land. What is the amount of Dena's recognized gain or loss on the exchange?

Accepted Answer

The answer of Dena owns 500 acres of farm land...

Question 17

Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building?

Accepted Answer

The answer of Moss exchanges a warehouse for a building...

Question 18

Owen and Polly have been married for five years. Owen sells investment property to Polly for a realized gain of $140,000. Owen's gain of $140,000 is not recognized and Polly's basis for the property she purchased is her cost.

Accepted Answer

The answer of Owen and Polly have been married for...

Question 19

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?

Accepted Answer

The exchange of business realty for investment realty qualifies for nonrecognition treatment as a § 1031 like-kind exchange as both properties are classified as real property. The other options do not qualify as like-kind exchanges because they do not involve the exchange of like-kind property. Partnerships interests, inventory, and securities are not considered real property, and therefore, do not meet the requirements for a § 1031 exchange.

Question 20

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

Accepted Answer

This statement is true according to current tax laws. The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

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