Question 1

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.

Question 2

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.

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 3

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 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.

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 5

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

Since the fair market value of the Blue Heron stock is greater than the adjusted basis of the Pelican stock, Leonore will have recognized a gain of $50,000 ($350,000 - $300,000). Therefore, her adjusted basis for the Blue Heron stock will be $350,000, not $300,000.

Question 6

Terry exchanges real estate acquired on August 25, 2012) held for investment for other real estate to be held for investment on September 1, 2018. 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, 2012.

Accepted Answer

This is correct according to the rules of a like-kind exchange under Section 1031 of the Internal Revenue Code. When property is exchanged for like-kind property to be held for investment or productive use, any realized gain is not recognized and the adjusted basis of the new property is the carryover basis of the old property. The holding period for the new property also begins on the date the old property was acquired.

Question 7

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 8

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.

Accepted Answer

The answer of If a taxpayer exchanges like-kind property under...

Question 9

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 future taxable event occurs (such as the sale or disposition of the asset). In a tax-free transaction, nonrecognition of gain or loss is permanent, as the basis of the asset received is equal to the basis of the asset transferred.

Question 10

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 11

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 12

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 the fair market value of the surrendered property is less than its adjusted basis in a like-kind exchange, the difference will be treated as a loss and may be recognized.

Question 13

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 an involuntary conversion as per the Internal Revenue Service (IRS).

Question 14

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 15

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 16

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 is still considered a like-kind exchange as both properties are real estate.

Question 17

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

Accepted Answer

This is a fundamental rule of § 1031 exchanges. If the taxpayer receives any "boot" (i.e. cash or non-like-kind property), the gain recognized must not exceed the gain realized on the transaction.

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.

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 19

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

Since both the land and warehouse are real property held for investment or business use, and Lola did not receive any cash in the exchange, it qualifies for a like-kind exchange treatment under Section 1031 of the Internal Revenue Code.

Question 20

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.

Accepted Answer

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

Quiz 15: Property Transactions: Nontaxable Exchanges