Deck 15: Property Transactions: Nontaxable Exchanges

Question 1

Pat owns a 1965 Ford Mustang which he uses for personal use. He purchased it four years ago for $22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000. Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

Answer 1

False

Question 2

The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.

Answer 2

False

Question 3

Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment.

Answer 3

True

Question 4

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.

Question 5

When boot in the form of cash is given in a like-kind exchange, recognized gain is the greater of the boot or the realized gain.

Question 6

The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.

Question 7

Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000). In addition, he receives cash of $6,000. If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).

Question 8

Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.

Question 9

Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock. Leonore's adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000. Leonore's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.
​

Question 10

Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business. If Clark is Kate's father, her realized gain of $150,000 must be recognized because they are related parties.

Question 11

An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.

Question 12

If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

Question 13

Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000). In addition, she receives $100,000 of cash. Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).

Question 14

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.

Question 15

The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

Question 16

The surrender of depreciated boot (fair market value is less than adjusted basis) in a like-kind exchange can result in the recognition of loss.

Question 17

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.

Question 18

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.

Question 19

Terry exchanges real estate (acquired on August 25, 2011) held for investment for other real estate to be held for investment on September 1, 2017. None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry's holding period for the new real estate begins on August 25, 2011.

Question 20

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

Question 21

If a taxpayer reinvests the net proceeds (amount received - related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain.

Question 22

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain).

Question 23

Gil's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss. One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000. His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Question 24

Milt's building which houses his retail sporting goods store is destroyed by a flood. Sandra's warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Question 25

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.

Question 26

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Question 27

Sidney, a calendar year taxpayer, owns a building (adjusted basis $450,000) in Columbus, OH, in which he conducts his retail computer sales business. The building is destroyed by fire on December 12, 2017, and two weeks later he receives insurance proceeds of $600,000. Due to family ties, Sidney decides to move to Columbia, SC. He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2, 2018. By electing § 1033, Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost - $150,000 postponed gain).

Question 28

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Question 29

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Question 30

A realized gain on an indirect (conversion into money) involuntary conversion of business property can be postponed, but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

Question 31

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

Question 32

If there is an involuntary conversion (i.e., casualty, theft, or condemnation) of the taxpayer's principal residence, the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence.

Question 33

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.

Question 34

If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction.

Question 35

Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

Question 36

At a particular point in time, a taxpayer can have two principal residences for § 121 exclusion purposes.

Question 37

If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Question 38

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.

Question 39

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2017. He receives insurance proceeds of $250,000 in January 2018. If before 2021, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

Question 40

Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

Question 41

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.

Question 42

Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.

Question 43

Which of the following statements is correct?

A)In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
B)In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
C)In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
D)All of the above.
E)None of the above.

Question 44

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?

A)Lily's recognized gain is $50,000 and her basis for the building received is $120,000.
B)Lily's recognized gain is $50,000 and her basis for the building received is $170,000.
C)Lily's recognized gain is $0 and her basis for the building received is $120,000.
D)Lily's recognized gain is $0 and her basis for the building received is $170,000.
E)None of the above is correct.

Question 45

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?

A)$0
B)$20,000
C)($20,000)
D)($25,000)
E)None of the above

Question 46

Which of the following statements is correct?

A) The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain.
B) The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss.
C) The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain.
D) Only a. and b.e. a., b., and c.

Question 47

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?

A)$0
B)$2,000
C)$6,000
D)$8,000
E)None of the above

Question 48

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

A)Partnership interest for a partnership interest.
B)Inventory for inventory.
C)Securities for personalty.
D)Business realty for investment realty.
E)None of the above.

Question 49

Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 like-kind exchange treatment?

A) Mexico City, Mexico.
B) Toronto, Canada.c. Paris, France.d. Only a. and b.e. None of the above.

Question 50

Deidra has owned and occupied her principal residence for 10 years. Two and one-half years ago she married Doug who moved into her house. Doug has never owned a home. When Deidra is transferred to another city, she sells the house and has a realized gain of $425,000. Deidra can exclude the realized gain of $425,000 from her gross income under § 121 if she and Doug file a joint return.

Question 51

Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct?

A) If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.
B) If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000.
C) If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

Question 52

Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.

Question 53

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions.

Question 54

Kendra owns a home in Atlanta. Her company transfers her to Chicago on January 2, 2017, and she sells the Atlanta house in early February 2017. She purchases a residence in Chicago on February 3, 2017. On December 15, 2017, Kendra's company transfers her to Los Angeles. In January 2018, she sells the Chicago residence and purchases a residence in Los Angeles. Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home.

Question 55

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?

A)$0 and $420,000.
B)$100,000 and $420,000.
C)$100,000 and $520,000.
D)$280,000 and $700,000.
E)None of the above.

Question 56

In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied?

A) The form of the transaction is a sale or exchange.b. Both the property transferred and the property received are held either for productive use in a trade or business or for investment.
C) The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property.
D) Only a. and b.e. a., b., and c.

Question 57

Wyatt sells his principal residence in December 2017 and qualifies for the § 121 exclusion. He sells another principal residence in November 2018. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Question 58

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?

A)$0, $30,000.
B)$5,000, $33,000.
C)$5,000, $30,000.
D)$8,000, $33,000.
E)None of the above.

Question 59

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.

Question 60

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?

A)$0 and $350,000.
B)$0 and $450,000.
C)($150,000) and $300,000.
D)($200,000) and $350,000.
E)None of the above.

Question 61

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

A) Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received.b. Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received.c. Fair market value of like-kind property received - postponed gain.
D) Only a. and c.e. None of the above.

Question 62

In October 2017, 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?

A)2006, 2017.
B)2006, 2006.
C)2009, 2009.
D)2009, 2017.
E)None of the above.

Question 63

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?

A) If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building to be used to sell inventory.
B) If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to be used in the taxpayer's business.
C) If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer's business.
D) Only b. and c.e. a., b., and c.

Question 64

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?

A)$0
B)$5,000
C)($2,000)
D)($7,000)
E)None of the above

Question 65

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)?

A)Her farm tractor is hauled to the city dump because it is worn out.
B)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement.
C)Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000.
D)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.
E)None of the above.

Question 66

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017. On January 11, 2018, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2018, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

A)$0 and $320,000.
B)$0 and $410,000.
C)$40,000 and $320,000.
D)$130,000 and 410,000.
E)None of the above.

Question 67

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2018. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020. What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

A)$0; $720,000.
B)$30,000; $750,000.
C)$30,000; $845,000.
D)$150,000; $750,000.
E)None of the above.

Question 68

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

A)Added to the basis of the old property.
B)Subtracted from the basis of the old property.
C)Added to the fair market value of the like-kind property received.
D)Subtracted from the fair market value of the like-kind property received.
E)None of the above.

Question 69

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.

Question 70

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion?

A)Al's business warehouse is destroyed by a tornado on October 31, 2017. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2017. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2019.
B)Heather's personal residence is destroyed by fire on October 31, 2017. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2017. She purchases another principal residence with the proceeds on October 31, 2019.
C)Mack's office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2017. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2020.
D)Lizzy's business automobile is destroyed in an accident on October 31, 2017. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2017. She purchases another business automobile with the proceeds on June 1, 2020.
E)All of the above.

Question 71

Myrna's personal residence (adjusted basis of $100,000) was condemned, and she received a condemnation award of $80,000. Myrna used the condemnation proceeds to purchase a new residence for $90,000. What is her recognized gain or loss and her basis in the new residence?

A)$0; $70,000.
B)$0; $90,000.
C)($20,000); $90,000.
D)($20,000); $70,000.
E)None of the above.

Question 72

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is:

A)The cost of the replacement property.
B)The fair market value of the involuntarily converted property minus the postponed gain.
C)The cost of the replacement property minus the postponed gain.
D)The amount realized.
E)None of the above.

Question 73

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:

A)Recognized to the extent of the deficiency (amount realized not reinvested).
B)Recognized to the extent of realized gain.
C)Recognized to the extent of the amount reinvested in excess of the adjusted basis.
D)Permanently not subject to taxation.
E)None of the above.

Question 74

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2017. If the insurance settlement was $950,000 (received March 1, 2018), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

A)December 31, 2017.
B)August 31, 2018.
C)December 31, 2019.
D)August 31, 2020.
E)None of the above.

Question 75

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

A)An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.
B)The postponement of realized gain in a § 1033 involuntary conversion is elective.
C)The functional use test is satisfied if a business warehouse is replaced with another business warehouse.
D)The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.
E)All of the above are correct.

Question 76

Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000). Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium. Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000 in severance damages. Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 + $300,000) proceeds are invested in the stock market. What is her recognized gain or loss associated with the receipt of the severance damages?

A)$0
B)$100,000
C)$300,000
D)$340,000
E)None of the above

Question 77

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?

A)$0
B)$25,000
C)$125,000
D)$175,000
E)None of the above

Question 78

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?

A)$0
B)$400,000
C)$500,000
D)$820,000
E)None of the above

Question 79

A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?

A)$0 and $450,000.
B)$0 and $460,000.
C)($10,000) and $440,000.
D)($10,000) and $450,000.
E)None of the above.

Question 80

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?

A)$310,000 realized and $310,000 recognized gain.
B)$310,000 realized and $0 recognized gain.
C)$110,000 realized and $110,000 recognized gain.
D)$110,000 realized and $0 recognized gain.
E)None of the above.