Question 1

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 - $15,000), but it is disallowed because he sold the stock to a related party (his son). This is known as the related party transaction rules. As a result, his adjusted basis in the stock carries over to his son's basis of $15,000, and Trish's recognized gain would be $11,000 ($26,000 - $15,000).

Question 2

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 by inheritance, Alex will receive a stepped-up basis equal to the fair market value at the time of Stuart's death, which would be $500,000. This means that if Alex sells the property for $500,000 or less, he will not owe any capital gains tax. However, if the property is transferred by gift, Alex will take over Stuart's basis of $190,000, and if he sells the property for more than that, he will owe capital gains tax on the difference. Therefore, it is preferable for the transfer to be by inheritance rather than by gift.

Question 3

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 IRS rules, when property is converted from personal use to business use, the basis for gain is the lower of the property's fair market value at the time of the conversion or its adjusted basis. This means that if the property has appreciated in value, the basis for gain will still be the lower of the two values (fair market value or adjusted basis). The basis for loss will also be the same as the basis for gain in this scenario.

Question 4

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 taxable event occurs (such as a subsequent sale of the property). In a tax-free transaction, nonrecognition of gain or loss is permanent, meaning that there will never be a taxable event for that particular transaction.

Question 5

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 paid by the seller are all expenses that the seller has to pay during the sale of the property. These expenses reduce the amount of money that the seller will receive from the sale, thus reducing the seller's amount realized.

Question 6

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 7

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.

Accepted Answer

To qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, real property must be exchanged for other real property of a like kind, which can be used for business or investment purposes. Personal property no longer qualifies for like-kind exchanges after the Tax Cuts and Jobs Act of 2017.

Question 8

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 9

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.

Accepted Answer

The exchange of land for a warehouse does qualify for like-kind exchange treatment since both properties are considered real property and are used for investment or business purposes.

Question 10

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 sales only apply to losses, so engaging in such transactions before the end of the tax year can help realize gains without triggering the wash sale rule.

Question 11

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.

Accepted Answer

The exchange of real property for real property can qualify as a like-kind exchange as long as they are both held for investment or productive use in a trade or business. The specific locations of the properties do not determine whether or not it is a like-kind exchange.

Question 12

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.

Accepted Answer

When exchanging property for other property or services, if there is a significant difference in value or if there is a change in use (personal to business or vice versa), it may be considered a taxable exchange. In this case, Abby is exchanging personal use property for business use property, which would trigger a taxable exchange. Therefore, the exchange does not qualify for nontaxable exchange treatment.

Question 13

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

Accepted Answer

This is true according to IRS regulations. When a wash sale occurs, the loss is disallowed and added to the cost basis of the replacement property.

Question 14

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 gain basis would be the fair market value of the SUV at the time it was contributed to the business, which is $30,000, and the loss basis would be the original purchase price of $45,000. The basis for cost recovery would remain at $45,000.

Question 15

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 16

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

Accepted Answer

The answer of Livestock of different sexes can qualify for...

Question 17

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 outlined in section 1091 of the IRS code.

Question 18

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.

Question 19

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.

Accepted Answer

The recognized gain is not $0, as the fair market value of the Blue Heron stock is greater than Leonore's adjusted basis for the Pelican stock. Her recognized gain would be $50,000, and her adjusted basis for the Blue Heron stock would be $350,000.

Question 20

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

Accepted Answer

Under § 1031, the nonrecognition of gains and losses is mandatory for both gains and losses when the transaction meets the requirements for a like-kind exchange.

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