Deck 15: Nontaxable Exchanges

Question 1

Section 121 could apply to a boat used as a principal residence and sold at a gain.

Answer 1

True

Question 2

B purchased a residence on April 12, 20X1 for $120,000.B moved in immediately and lived in the home until it sold for $165,000 on March 25, 20X4.B may exclude all of the gain even though the home was not owned for five years.

Answer 2

True

Question 3

A taxpayer who owns rental property that lies in the formally announced path of a future highway may sell the property to a private party and defer any gain just as if the property had been condemned by a government agency.

Answer 3

True

Question 4

Liabilities discharged generally are treated as boot, equivalent to money, received in a like-kind exchange.

Question 5

Section 1033, dealing with involuntary conversions, is mandatory if all requirements are met (even if the taxpayer receives only cash).

Question 6

If a husband and wife divorce and their jointly owned residence is transferred to one spouse six months after the divorce, no gain or loss is recognized.

Question 7

K currently owns two residences.She lived in the first from January 1, 20X1 until June 30, 20X4.She lived in the second from July 1, 20X4 until June 30, 20X6.Both residences have been owned since January 1, 20X1 and were either rented or vacant when not occupied by K.K can sell both residences on June 30, 20X6 and exclude her entire gain.

Question 8

If a husband and wife own their principal residence jointly, both must meet the ownership and occupancy tests to exclude the gain under § 121.

Question 9

An involuntary conversion of rental real estate property requires replacement with property that serves the same "taxpayer use." This means that the property need only be replaced with other rental property.

Question 10

The owner/operator of a hamburger stand that has been condemned to make way for a highway must find replacement property of similar "functional" use to defer gain under § 1033.

Question 11

Bonds and debentures do not qualify for like-kind exchange treatment.

Question 12

U.S.currency is always considered boot in a like-kind exchange.

Question 13

A loss on the sale of a principal residence may be deducted in the year of sale as a capital loss.

Question 14

An involuntary conversion due to a casualty need not meet the "suddenness" test that is applied to the casualty loss deduction.

Question 15

A single taxpayer who meets the ownership and use tests may exclude gain of $250,000 on the sale of her principal residence under § 121.Any gain in excess of $250,000 must be recognized.

Question 16

Like-kind exchange treatment only applies if no property other than "like-kind property" is received.

Question 17

A taxpayer is able to use § 121 even if he or she temporarily rents his or her primary residence while trying to sell it.

Question 18

J and H sold their jointly owned residence at a $325,000 gain during the current year.J owned the residence for four years and lived in it the entire time.After their wedding, J transferred a one-half interest to H, who immediately moved in and lived in the home for 18 months.J and H can exclude only $250,000 of their gain.

Question 19

Growing timber that is leveled by a natural disaster may be sold in its normal market.If it is replaced, the gain can be deferred if it is replaced by property that is similar or related in use.

Question 20

Involuntary conversion treatment under § 1033 applies to gains and losses.

Question 21

A warehouse owned and used by Company Z was involuntarily converted by casualty.Which of the following will qualify as a replacement property, subject to nonrecognition of gain?

A)Another warehouse purchased, provided that the amount reinvested equals or exceeds the amount realized from the converted property
B)A vacant parcel of land
C)Rental real property
D)Another warehouse already owned by Company Z
E)More than one of the above

Question 22

Q, who is 62 years of age, sold her principal residence for $340,000 and elected to exclude the maximum amount under § 121 for an unmarried person.The residence cost $85,000 several years ago.Selling costs of $3,000 were incurred.If Q purchases a replacement residence within two years for $120,000, how much gain must she recognize and what is her basis in the replacement home, respectively?

A)$252,000; $120,000
B)$2,000; $0
C)$2,000; $120,000
D)$126,000; $120,000

Question 23

Which of the following is true about the gain excluded on the sale of a personal residence by certain individuals?

A)The taxpayer generally must be at least 55 years of age on the date of sale.If husband and wife sell a jointly owned residence, both must be at least 55 years of age.
B)The residence must have been used by the taxpayer as his/her personal residence for at least five of the seven years preceding the sale.
C)Any portion of gain in excess of the limit must be recognized.
D)Only one residence qualifies for this exclusion during a person's lifetime.

Question 24

Which of the following is not necessarily true of the replacement property in an involuntary conversion?

A)The replacement property must be purchased within two years of the conversion.
B)If the converted property is real estate used by the taxpayer, the replacement property must serve the same basic function as the converted property.
C)For condemned real property used in a business, broader groups of replacement properties and a longer reinvestment period (an additional year) are allowed.
D)The replacement property may not have been owned by the taxpayer prior to the conversion or the threat of condemnation.

Question 25

Which of the following is true of the exclusion of gain under § 121?

A)The taxpayer (or spouse) must be 55 years of age or older on the date of sale of the principal residence in order to apply the exclusion.
B)The residence must have been used as a principal residence by the owner/taxpayer (or spouse) for at least two years within the five-year period ending on the date of sale.
C)The exclusion is elective but may not be revoked.
D)The exclusion may be used only once by a taxpayer.

Question 26

Which of the following is not considered an involuntary conversion?

A)Voluntary sale of property after public announcement that it will be condemned for use as a highway right of way
B)Weather damage that meets all tests for casualty loss treatment except the suddenness test
C)Theft of property
D)Actual condemnation of property because it was structurally unsuitable for occupancy

Question 27

G lost his small manufacturing facility to fire during the current year.The building originally cost $35,000 and had been depreciated in the amount of $22,000.His insurance company paid him $42,000 for a total loss, and he had a new building constructed 18 months later at a cost of $40,500.How much gain must G recognize on this casualty?

A)$5,500
B)$29,000
C)$13,000
D)$1,500

Question 28

Many changes in the form of doing business, such as the receipt of an interest on formation of a partnership in exchange for property, are allowed to occur without gain recognition.

Question 29

P, a single individual, purchased a new home on April 1, 20X1 for $375,000.On July 1, 20X2, P sold the property for $490,000, so she could take a new job 300 miles from her old home.The new job involved a promotion.How much gain must P recognize?

A)$115,000
B)$71,875
C)$44,125
D)$0

Question 30

Y exchanges a rent house, which he owned outright (i.e., no liabilities existed), for an apartment complex.The apartment complex was subject to a $150,000 mortgage, and to make the deal even, Y received $3,400 cash.Y must recognize part or all of the realized gain on this exchange.

Question 31

Like-kind exchange treatment is elective.

Question 32

F exchanged a vacant lot held for investment for a factory building to be used in her manufacturing business.These properties are like-kind properties to F.

Question 33

J sold her qualifying personal residence for $275,000.She incurred selling expenses of $6,000 and "fix-up expenses" of $3,000.J's adjusted basis in her residence was $137,000.What are the amounts of J's gain realized and gain recognized, respectively?

A)$132,000; $132,000
B)$132,000; $0
C)$129,000; $0
D)$129,000; $129,000

Question 34

G exchanged a rent house for another specified rent house to be received five months later.This qualifies as a like-kind exchange.

Question 35

An apartment complex owned by H, a calendar year individual taxpayer, was destroyed in a landslide on January 12, 19X6.The apartments (including the land) had cost $600,000 and had an adjusted basis of $250,000.The insurance company paid $445,000 for the land and damaged buildings on March 12, 19X6.Which of the following is not necessarily true?

A)To be eligible for deferral, H must purchase other real estate to be used as rental property.
B)To be eligible for deferral, H must reinvest by March 12, 19X8.
C)In order to avoid recognizing any gain on this insurance settlement, H must reinvest at least $445,000.
D)Even if H reinvests, the $195,000 gain can be recognized, and the basis in the replacement will be its full cost.

Question 36

Q, a single individual, purchased a new home on July 1, 20X1 for $265,000.On July 1, 20X2, Q moved into a convalescent home due to a chronic disease.The home remained vacant for three months and was rented for nine months while Q was institutionalized.Then the home was sold at a gain of $175,000.How much gain must Q recognize?

A)$175,000
B)$50,000
C)$87,500
D)$0

Question 37

Which of the following is not true of like-kind exchange treatment?

A)It is mandatory.
B)It applies to losses as well as gains.
C)Liabilities discharged generally are treated as boot received.
D)It applies to exchanges of inventory.

Question 38

Which of the following is not true of principal residences?

A)"Principal residence" can refer only to property which the taxpayer owns.
B)A taxpayer cannot occupy two principal residences at the same time.
C)If a taxpayer rents out his or her former principal residence while trying to sell it, it may still qualify as the taxpayer's principal residence for purposes of § 121.
D)A taxpayer can exclude gain only on the sale of one property every two years.

Question 39

Y owns a home in which she has lived with her spouse, Z, for seven years.On June 2, 20X2, the home was sold at a gain of $325,000.How much gain must Y recognize?

A)$325,000 if Y files separately
B)$0 if Y and Z file jointly
C)$75,000, regardless of filing status
D)$0, regardless of filing status

Question 40

Which of the following types of business or investment property are not excluded from like-kind exchange treatment?

A)Securities
B)Livestock of the same species but exchanged for the other sex
C)Inventory held for sale
D)Business machines

Question 41

M exchanged a vacant lot worth $32,500 for farm land worth $28,500.M received $1,000 down and will receive $1,000 per year for each of the three following years.M's basis in the lot was $29,000.How much gain must M recognize in each of the four years, respectively?

A)$1,000; $1,000; $1,000; $500
B)$875; $875; $875; $875
C)$3,500; $0; $0; $0
D)$500; $1,000; $1,000; $1,000

Question 42

B exchanges investment land with an adjusted basis of $40,000 for another parcel of investment land with a fair market value of $50,000 plus $12,000 in cash.What is B's recognized gain on this exchange?

A)$12,000
B)$20,000
C)$22,000
D)No gain is recognized.

Question 43

A gain may be deferred on the exchange of a life insurance contract for

A)Another life insurance policy.
B)Certain annuity contracts.
C)Certain endowment contracts.
D)All of the above.

Question 44

D exchanged an apartment complex that he had owned for eight years for farm land.The apartment complex was worth $1,050,000 and D's basis was $475,000.The transferee assumed a note secured by an interest in the property of $800,000.D received $10,000 cash and assumed liability for loans against the farm land he received in the amount of $700,000.How much is D's gain recognized and his basis in the farm land (fair market value = $940,000), respectively?

A)$110,000 and $475,000
B)$110,000 and $465,000
C)$0 and $365,000
D)$10,000 and $375,000

Question 45

Which of the following exchanges of property (used for business or investment purposes) are not like-kind exchanges?

A)Warehouse for condominium
B)Beach house for yacht
C)Cadillac business car for an Escort business car
D)Apartment building for vacant lot

Question 46

M traded in her business computer at a local dealer.Her cost in the old machine was $3,500 and her basis was $1,470.She paid $1,500 cash in the trade for a computer worth $4,000.How much is M's recognized gain or loss, and what is her basis in the new computer, respectively?

A)$0 and $1,470
B)$0 and $2,970
C)$1,030 and $4,000
D)$530 and $3,500

Question 47

B exchanges investment land with an adjusted basis of $55,000 for another parcel of investment land with a fair market value of $50,000 plus $12,000 in cash.B recognizes how much gain?

A)$12,000
B)$7,000
C)$5,000
D)No gain is recognized.

Question 48

X exchanged rental property worth $40,000 with an adjusted basis of $25,000 and no liabilities, for Y's rental property worth $75,000 which had an adjusted basis of $57,000 and which was subject to a mortgage of $40,000.Y also transferred to X $5,000 worth of stock in which Y had an adjusted basis of $3,000.The gains recognized by X and Y, respectively, in this exchange are:

A)$5,000; $18,000
B)$13,000; $22,000
C)$13,000; $20,000
D)$5,000; $20,000

Question 49

B transfers investment land with an adjusted basis of $70,000 for other investment land with a fair market value of $50,000 plus $12,000 in cash.B recognizes how much gain or loss?

A)$20,000 loss
B)$8,000 loss
C)$12,000 gain
D)No gain or loss is recognized.

Question 50

Which of the following exchanges is not considered a nontaxable transaction?

A)Transfer of property to a partnership in exchange for a partnership interest
B)Transfer of property owned by a controlling shareholder to the corporation in exchange for stock
C)Exchange of common stock for common stock of the same corporation
D)All of the above are nontaxable transactions.

Question 51

Which of the following is not true of boot in a like-kind exchange?

A)Liabilities discharged in a like-kind exchange are considered boot received.
B)Boot received (other than liabilities) can be offset by net liabilities incurred.
C)The receipt of boot does not cause the recognition of any realized losses in a like-kind exchange.
D)The payment of boot may be offset against liabilities discharged.

Question 52

Which of the following is not true of like-kind exchanges of real property?

A)Improved real estate is not considered a like-kind exchange for unimproved real estate.
B)A lease on real property with a remaining term of at least 30 years is treated as real property in a like-kind exchange.
C)Condemned real estate in an involuntary conversion is treated under the like-kind rules.
D)Real property in a like-kind exchange need not be of the same class.