Deck 13: Part 2--Property Transactions: Determination of Gain or Loss,basis Considerations,and Nontaxable Exchanges

Question 1

Jessica inherits land from her uncle.His adjusted basis in the land (purchased in November 2004)was $110,000 and it was included in his estate at a value of $225,000.

Answer 1

Question 2

Hilary receives $10,000 for a 13-foot wide utility easement along one of the boundaries to her property.The easement provides that no structure can be built on that portion of the property.Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage.Determine the effect of the $10,000 payment on Hilary's gross income and her basis for the property.

Answer 2

Hilary does not report the $10,000 payment in her gross income.Instead,she reduces the basis for the property by the $10,000 payment from $200,000 to $190,000.

Question 3

Mel gives a parcel of land to his son,Scott.He had purchased the land in 1997 for $140,000 and its fair market value on the date of the gift is $125,000.No gift tax is paid.Scott subsequently sells the land for $131,000.

Answer 3

Note that a realized gain of $6,000 results if the basis for loss is used.
Since the amount realized of $131,000 is between Scott's loss basis of $125,000 and gain basis of $140,000,neither gain nor loss results.

Question 4

On January 15 of the current taxable year,Merle sold stock with a cost of $40,000 to his brother Ned for $25,000,its fair market value.On June 21,Ned sold the stock to a friend for $26,000.

Question 5

Inez's adjusted basis for 6,000 shares of Cardinal,Inc.common stock is $600,000.During the year,she receives a 5% stock dividend.

Question 6

Albert is considering two options for selling land for which he has an adjusted basis of $70,000 and on which there is a mortgage of $100,000.Under the first option,Albert will sell the land for $150,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option,Albert will sell the land for $50,000 and the buyer will assume the mortgage.Calculate Albert's recognized gain under both options.

Question 7

Felix gives 100 shares of stock to his daughter,Monica.The stock was acquired in 2001 for $20,000,and at the time of the gift,it had a fair market value of $60,000.Felix paid a gift tax of $6,000.

Question 8

Nigel purchased a blending machine for $125,000 for use in his business.As to the machine,he has deducted MACRS cost recovery of $31,024,maintenance costs of $5,200,and repair costs of $4,000.Calculate Nigel's adjusted basis for the machine.

Question 9

On September 18,2010,Jerry received land and a building from Ted as a gift.Ted had purchased the land and building on March 5,2007,and his adjusted basis and the fair market value at the date of the gift were as follows:
Ted paid gift tax on the transfer to Jerry of $96,000.

Question 10

Marge purchases the Kentwood Krackers,a AAA level baseball team,for $1.5 million.The appraised values of the identified assets are as follows:
The Krackers have won the pennant for the past two years.Determine Marge's adjusted basis for the assets of the Kentwood Krackers.

Question 11

Ollie owns a personal use car for which he originally paid $42,000.He trades the car in on a sports utility vehicle (SUV)paying the automobile dealer cash of $24,000.If the negotiated price of the SUV is $45,000,what is Ollie's recognized gain or loss and his adjusted basis for the SUV?

Question 12

Louis sold his farm during the current taxable year.At the date of the sale,the farm had an adjusted basis of $212,000 and was encumbered by a mortgage of $190,000.The buyer paid him $110,000 in cash,agreed to take the title subject to the $190,000 mortgage,and agreed to pay him $80,000 with interest at 9 percent one year from the date of sale.How much is Louis' recognized gain on the sale?

Question 13

Hubert purchases Fran's jewelry store for $950,000.The identifiable assets of the business are as follows:
Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete.How should Hubert allocate the $950,000 purchase price to the assets?

Question 14

Annette purchased stock on March 1,2010,for $32,000.At December 31,2010,it was worth $29,000.She also purchased a bond on September 1,2010,for $9,000.At year end,it was worth $12,000.Determine Annette's realized and recognized gain or loss.

Question 15

Elbert gives stock worth $28,000 (no gift tax resulted)to his friend,Jeff,on June 8,2010.Elbert purchased the stock on September 1,2003,and his adjusted basis is $22,000.Jeff dies on December 8,2011,and bequeaths the stock to Elbert.At that date,the fair market value of the stock is $31,000.

Question 16

Misty owns stock in Violet,Inc. ,for which her adjusted basis is $75,000.She receives a cash distribution of $52,000 from Violet.

Question 17

Renee purchases taxable bonds with a face value of $200,000 for $212,000.The annual interest paid on the bonds is $10,000.Assume Renee elects to amortize the bond premium.The total premium amortization for the first year is $1,600.

Question 18

Ed and Cheryl have been married for 27 years.They own land jointly with a basis of $140,000.Ed dies in 2010,when the fair market value of the land is $220,000.Under the joint ownership arrangement,the land passed to Cheryl.

Question 19

Amanda uses a delivery van in her business.The adjusted basis is $21,000,and the fair market value is $18,000.The delivery van is stolen and Amanda receives insurance proceeds of $18,000.Determine Amanda's realized and recognized gain or loss.

Question 20

Walter acquired tax-exempt bonds for $330,000 in December 2010.The bonds,which mature in December 2015,have a maturity value of $300,000.Walter does not make any elections regarding the amortization of the bond premium.Determine the tax consequences to Walter when he redeems the bonds in December 2015.

Question 21

Use the following data to determine the sales price of Tricia's principal residence and the realized gain.She is not married.The sale of the old residence qualifies for the § 121 exclusion.

Question 22

Sandy and Greta form Tan,Inc.by transferring the following assets to the corporation in exchange for 1,000 shares of stock each.
Sandy: Cash of $100,000
Greta: Land (worth $100,000;adjusted basis of $60,000).
How much gain must Tan recognize on the receipt of these assets?

Question 23

Evelyn's office building is destroyed by fire on July 12,2010.The adjusted basis is $272,000.She receives insurance proceeds of $300,000 on August 31,2010.Calculate the amount that Evelyn must reinvest in qualifying property in order that her recognized gain be $15,000.Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion)postponement treatment.

Question 24

Eunice Jean exchanges land held for investment located in Rolla,Missouri,for land to be held for investment located near Madrid,Spain.Her basis for the land given up is $370,000 and the fair market value of the land received is $390,000.Eunice Jean also receives cash of $25,000.

Question 25

Laura transfers her personal use automobile to her business.The car's adjusted basis is $20,000 and the fair market value is $15,000.Determine the adjusted basis of the car to Laura's sole proprietorship including the basis for cost recovery.

Question 26

Justin owns 1,000 shares of Oriole Corporation common stock (adjusted basis of $9,800).On April 27,2010,he sells 300 shares for $2,800,while on May 5,2010,he purchases 200 shares for $2,500.

Question 27

Tricia's office building,which has an adjusted basis of $220,000,is destroyed by fire on May 5,2010.Insurance proceeds of $425,000 are received on June 1,2010.She has a new office building constructed for $410,000,which she occupies on October 1,2011.Assuming Tricia's objective is to minimize the tax liability,calculate her recognized gain or loss and the basis of the new office building.

Question 28

After 5 years of marriage,Dave and Janet decided to get a divorce.As part of the divorce settlement,Janet transfers to Dave the house she purchased prior to their marriage.Janet's adjusted basis for the house is $125,000 and the fair market value is $200,000 on the date of the transfer.What are the tax consequences to Janet and to Dave as a result of the transfer?

Question 29

Lucinda,a calendar year taxpayer,owned a rental property with an adjusted basis of $215,000 in a major coastal city.When her property was condemned by the city government on November 5,2010,in order to build a convention center,Lucinda eventually received qualified replacement property from the city government on February 5,2011.This new property has a fair market value of $350,000.

Question 30

For each of the following involuntary conversions,determine if the property qualifies as replacement property.

Question 31

Janet,age 68,sells her principal residence for $500,000.She purchased it twenty-two years ago for $150,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Janet's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.

Question 32

On January 5,2010,Bill sells his principal residence with an adjusted basis of $185,000 for $500,000.He has owned and occupied the residence for 18 years.He pays $30,000 in commissions and $1,200 in legal fees in connection with the sale.One month before the sale,Bill painted the house at a cost of $4,000 and repaired various items at a cost of $2,500.On October 15,2010,Bill purchases a new home for $400,000.On November 15,2011,he pays $25,000 for completion of a new room on the house,and on January 14,2012,he pays $15,000 for the construction of a pool.What is the Bill's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

Question 33

Katrina,age 58,rented (as a tenant)the house that was her principal residence from January 1,2010 through December 31,2011.She purchased the house on January 1,2012,for $150,000 and continued to occupy it through June 30,2013.She leased it to a tenant from July 1,2013,through December 31,2014.On January 1,2015,she sells the house for $350,000.She incurs a realtor's commission of $20,000.Calculate her recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire another residence.

Question 34

Ashley sells investment land (adjusted basis of $145,000)that she has owned for 4 years to her husband,Richard,for its fair market value of $125,000.

Question 35

a.Orange Corporation exchanges a warehouse located in New York (adjusted basis of $300,000)for a warehouse located in New Jersey (adjusted basis of $350,000;fair market value of $250,000).Indicate the amount of gain or loss that is recognized by Orange Corporation on the exchange,and the basis of the warehouse acquired.

Question 36

Vicki sells a parcel of land to her son,Dan,for $40,000.Vicki's adjusted basis is $45,000.Two years later Dan gives the land to his fiancée,Karen.At that date,the land is worth $47,000.No gift tax is paid.Since Dan is going to be stationed in the U.S.Army in Germany for 3 years,they do not plan on being married until his tour is completed.Six months after receiving the land,Karen sells it for $48,000.Calculate Karen's realized and recognized gain or loss.

Question 37

What is the general formula for calculating the amount realized on the sale or other disposition of property?

Question 38

Don,who is single,sells his personal residence on October 5,2010,for $380,000.His adjusted basis was $102,000.He pays realtor's commissions of $18,000.He owned and occupied the residence for 14 years.Having decided that he no longer wants the burdens of home ownership,he invests the sales proceeds in a mutual fund and enters into a 1-year lease on an apartment.The detriments of renting,including a crying child next door,cause Don to rethink his decision.Therefore,he purchases another residence on November 6,2011,for $188,000.Is Don eligible for exclusion of gain treatment under § 121 (exclusion of gain on sale of principal residence)? Calculate Don's recognized gain and his basis for the new residence.

Question 39

For the following exchanges,indicate which qualify as like-kind property.

Question 40

Samuel's hotel is condemned by the City Housing Authority on July 5,2010,for which he is paid condemnation proceeds of $950,000.He first received official notification of the pending condemnation on May 2,2010.Samuel's adjusted basis for the hotel is $600,000 and he uses a fiscal year for tax purposes with a September 30 tax year-end.

Question 41

Alice is terminally ill and does not expect to live much longer.Pondering the consequences of her estate,she decides how to allocate her property to her nieces.She makes a gift of depreciated property (i.e. ,adjusted basis exceeds fair market value)to Marsha,a gift of appreciated property (i.e. ,fair market value exceeds adjusted basis)to Jan,and leaves appreciated property to Cindy in her will.Each of the properties has the same fair market value.From an income tax perspective,which niece is her favorite?

Question 42

Seth and Cheryl,husband and wife,own property jointly.The property has an adjusted basis of $25,000 and a fair market value of $30,000.

Question 43

If a taxpayer purchases taxable bonds at a premium,the amortization of the premium is elective.However,if a taxpayer purchases tax-exempt bonds at a premium,the amortization of the premium is mandatory.Explain this difference in the treatment.

Question 44

Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a nephew.

Question 45

Mitchell owned an SUV that he had purchased two years ago for $48,000 and which he transfers to his sole proprietorship.How is the sole proprietorship's basis for the SUV calculated? What additional information does Mitchell need?

Question 46

If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets,how is the excess allocated among the purchased assets?

Question 47

Discuss the application of holding period rules to property acquired by gift and inheritance.

Question 48

Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.

Question 49

Lois received nontaxable stock rights with a fair market value of $4,000.The fair market value of the stock on which the rights were received is $24,000 (cost $14,000).Assume the rights are exercised by paying $31,000 plus the rights.Discuss how to calculate the basis of the old stock and the basis of the new stock.

Question 50

For gifts made after 1976,when will part of the gift tax paid by the donor be added to the donee's basis?

Question 51

Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000)from personal use to business use.Justin receives a building with a $40,000 fair market value ($50,000 donor's adjusted basis)from his mother as a gift.Discuss the tax consequences with respect to Joseph's and Justin's adjusted basis.

Question 52

Describe the relationship between the recovery of capital doctrine and the realized and recognized gain and loss concepts.

Question 53

What effect does a deductible casualty loss have on the adjusted basis of property?

Question 54

What is the general formula for calculating the adjusted basis of property?

Question 55

What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?

Question 56

Can dividend treatment result to a shareholder on a distribution from a corporation that has no E & P?

Question 57

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

Question 58

What is the difference between the depreciation (or cost recovery)allowed and the depreciation (or cost recovery)allowable and what effect does each have on the adjusted basis of property?

Question 59

For disallowed losses on related-party transactions,who has the right of offset?

Question 60

Tariq sold certain U.S.Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction.He felt that the U.S.Government and State of Oregon bonds were "good" investments,so he repurchased identical securities within one week.Do these transactions constitute wash sales?

Question 61

Albert,age 57,leased a house for one year in Denver with an option to buy as his personal residence.At the end of the lease,he purchased the house.He lived there for an additional 25 months before his employer transferred him to Tucson.Expecting to be in Tucson for 18 to 24 months,he rented the Denver house for 18 months with an option to extend on a month to month basis for an additional 6 months.At the end of the 18-month period,Albert's employer offered him a permanent position in Tucson as branch manager.The tenant who had been occupying Albert's house in Denver purchased it at the end of the 24-month extended lease period.Is Albert eligible to elect exclusion treatment under § 121?

Question 62

Sam sells land with an adjusted basis of $35,000 and a fair market value of $50,000 to Cynthia,his wife,for $50,000.Discuss how the tax consequences would differ if Sam and Cynthia had never been married.

Question 63

Rose's manufacturing plant is destroyed by fire on the afternoon of November 1,2010.The adjusted basis is $800,000.The insurance company offers a settlement of $760,000.After protracted negotiations,Rose receives $810,000 on July 25,2011.Rose is a fiscal year taxpayer whose tax year ends on June 30th.What is the latest date that Rose can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

Question 64

Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.

Question 65

Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?

Question 66

Discuss the treatment of losses from involuntary conversions.

Question 67

Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.

Question 68

Discuss the treatment of realized gains from involuntary conversions.

Question 69

Melissa,age 58,marries Arnold,age 50,on June 1,2010.Melissa decides to sell her principal residence on August 1,2010,which she has owned and occupied for the past 30 years.Arnold has never owned a house.However,while he was married to Kelly who died 6 months prior to his marriage to Melissa,Kelly used the § 121 election on the sale of her residence in January 2008 to reduce her realized gain from $123,000 to $0.Kelly used the sales proceeds to pay off Arnold's gambling debts.Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?

Question 70

Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.

Question 71

Louis owns a condominium in New Orleans which has been his principal residence for 12 years.He wants to be near Lake Ponchartrain since he enjoys water activities.Therefore,he sells the condominium.His original intent was to purchase a house in New Orleans near the lake.However,the cost of such properties far exceeded his sales proceeds.He was able to purchase a house on the lake in Covington,which is located across the causeway.He invested all of his sales proceeds in the Covington house.After two months of commuting over an hour to and from work each day,he decides to rent an efficiency apartment in New Orleans near his office.He spends the weekends and vacations at his home in Covington.

Question 72

Why is it generally undesirable to pass property by death when its fair market value is less than basis?

Question 73

What kinds of property do not qualify under the like-kind provisions?

Question 74

Taxpayer acquired a personal residence ten years ago when he was 50 years old.During this period he has occupied the residence for only nine months (out of 12)each year due to winter vacations in Florida.Is taxpayer eligible for exclusion of gain under § 121?

Question 75

Distinguish between a direct involuntary conversion and an indirect involuntary conversion.

Question 76

Can related parties take advantage of the like-kind exchange provisions?

Question 77

Taxpayer's principal residence is destroyed by a tornado.Taxpayer is single and his realized gain is $400,000.Is it possible for the taxpayer's recognized gain to be $0?

Question 78

Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?

Question 79

Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges)and the adjusted basis and holding period for the replacement property.

Question 80

What effect do the assumption of liabilities have on a § 1031 like-kind exchange?