Question 1

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.

Accepted Answer

Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of like-kind property used in a trade or business or held for investment. However, it specifically excludes exchanges of inventory, stocks, bonds, notes, other securities, partnership interests, and certificates of trust. Personal property must be of the same general asset or product class to qualify as like-kind.

Question 2

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

Accepted Answer

Section 1033 primarily addresses the nonrecognition of gain for involuntary conversions, not losses. It allows taxpayers to defer recognition of gain if they reinvest the proceeds into similar property, but it does not specifically apply to losses in the same way.

Question 3

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2014. He receives insurance proceeds of $250,000 in January 2015. If before 2018, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

Accepted Answer

This is known as an involuntary conversion and Dennis can elect to postpone the recognition of any realized gain if he replaces the warehouse with another qualifying property within a certain time frame.

Question 4

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.

Accepted Answer

When a taxpayer reinvests the net proceeds in qualifying replacement property within the statutory time period, they can defer the recognition of the realized gain. This is known as a like-kind exchange or a Section 1031 exchange.

Question 5

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.

Accepted Answer

This is the definition of involuntary conversion as defined by the IRS.

Question 6

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).

Accepted Answer

Shari's recognized gain is $300,000, which is the lesser of the gain realized ($300,000, calculated as the fair market value of the apartment building plus cash received [$900,000 + $100,000] minus the adjusted basis of the office building [$700,000]) or the boot received ($100,000). However, the correct calculation for the basis of the new property is the fair market value of the apartment building ($900,000) minus the gain not recognized ($200,000, which is the gain realized minus the boot received) or plus the loss if realized, which results in a basis of $700,000 for the apartment building, not $800,000.

Question 7

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

Accepted Answer

The answer of Under the taxpayer­use test for a §...

Question 8

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.

Accepted Answer

Recognized gain in a like-kind exchange when boot is received is the lesser of the realized gain or the amount of boot received, not the greater.

Question 9

If boot is received in a § 1031 like­kind 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.

Accepted Answer

The holding period for the like-kind property received in a § 1031 exchange tacks onto the holding period of the property exchanged (i.e., it continues from the original property's holding period), whereas the holding period for the boot received begins on the date of the exchange.

Question 10

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

Accepted Answer

This statement is true as defined by the rules of a § 1031 like-kind exchange. The amount of boot received must be recognized as gain up to the amount of realized gain, but not exceeding it.

Question 11

Pat owns a 1965 Mustang car 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.

Accepted Answer

The answer of Pat owns a 1965 Mustang car which...

Question 12

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, 2014, 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, 2015. 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).

Accepted Answer

This statement is correct. Sidney has postponed his gain under § 1033 by reinvesting all of the insurance proceeds in a new building within the statutory replacement period. As a result, he has no recognized gain and a basis in the new building of $450,000 ($600,000 cost - $150,000 postponed gain).

Question 13

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.

Accepted Answer

The answer of Kate exchanges land held as an investment...

Question 14

Terry exchanges real estate (acquired on August 25, 2008) held for investment for other real estate to be held for investment on September 1, 2014. 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, 2008.

Accepted Answer

This statement is true according to the rules of Section 1031 of the Internal Revenue Code. When real estate held for investment is exchanged for other real estate held for investment, the realized gain is not recognized, and the adjusted basis of the new property is a carryover basis from the old property. The holding period for the new property also begins on the same date as the old property.

Question 15

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.

Accepted Answer

If a taxpayer surrenders a depreciated boot (property that is not like-kind and has a fair market value less than the adjusted basis) in a like-kind exchange, the difference between the adjusted basis and the fair market value will result in a loss that needs to be recognized for tax purposes.

Question 16

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

Accepted Answer

The answer of If a taxpayer exchanges like­kind property under...

Question 17

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.

Accepted Answer

The statement is correct. The amount realized does not include any amount received as severance damages, which are specifically designated as such by both the government and the taxpayer.

Question 18

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

Accepted Answer

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

Question 19

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.

Accepted Answer

Under U.S. tax law, properties involved in a like-kind exchange must be located within the United States to qualify for like-kind exchange treatment.

Question 20

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).

Accepted Answer

The answer of Milt's building which houses his retail sporting...

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

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.

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

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.

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.

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

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.

If boot is received in a § 1031 likekind 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.

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

Pat owns a 1965 Mustang car 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.

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.

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.

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

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.

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

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.

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

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.

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

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.

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.

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

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.

If boot is received in a § 1031 like­kind 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.

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

Pat owns a 1965 Mustang car 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.

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.

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.

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

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.

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

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.

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

If boot is received in a § 1031 likekind 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.

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

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