Question 1

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 2

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

This statement is true. Under Section 1033 of the Internal Revenue Code, if a taxpayer reinvests the net proceeds amount (related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, then the taxpayer may defer the recognition of the realized gain.

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

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 5

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 6

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, 2018, 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, 2019.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

By electing § 1033, Sidney can postpone the gain from the sale of the Columbus building and reinvest it into a new building without recognizing it for tax purposes. Therefore, he has no recognized gain and a basis in the new building of $450,000 + $600,000 cost - $150,000 postponed gain.

Question 7

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 asset is less than the adjusted basis, it results in a recognized loss in a like-kind exchange.

Question 8

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 added to the basis of the like-kind property received, and it does not directly take the fair market value as its basis. The basis adjustment reflects the gain recognized, not the fair market value of the boot.

Question 9

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 true. The amount realized refers to the total amount received by the taxpayer from the sale or exchange of property, and does not include any amounts designated as severance damages.

Question 10

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

An involuntary conversion is defined as the loss of property due to destruction, theft, seizure, requisition, or condemnation.

Question 11

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...

Question 12

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 13

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

Both the land and warehouse are real properties, hence they qualify for like-kind exchange treatment. The fact that Lola is leasing the warehouse to a tenant and the intended use of the warehouse doesn't affect the eligibility of the exchange for like-kind treatment.

Question 14

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.

Accepted Answer

The answer of Under the taxpayer-use test for a §...

Question 15

Dennis, a calendar year taxpayer, owns a warehouse adjusted basis of $190,000) which is destroyed by a tornado in October 2018.He receives insurance proceeds of $250,000 in January 2019.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.

Accepted Answer

This is the rule for the involuntary conversion of property, specifically for replacement property. As long as Dennis replaces the destroyed warehouse with a new one of equal or greater value before 2021, he can elect to defer recognition of the gain on the insurance proceeds.

Question 16

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

Accepted Answer

This is the basic rule of § 1031 exchanges, also known as "like-kind exchanges." When property is exchanged for other property of like kind, any gain is deferred until the new property is sold. However, if any "boot" (i.e. cash or property that is not of like kind) is received in the exchange, any gain must be recognized up to the amount of boot received. In other words, recognized gain cannot exceed the realized gain.

Question 17

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 because when property is exchanged for like-kind property held for investment, under Section 1031 of the Internal Revenue Code, the realized gain is not recognized, and the adjusted basis of the new property is a carryover basis from the old property. Additionally, the holding period for the new property is considered to begin on the same date as the old property.

Question 18

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...

Question 19

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 20

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.

Quiz 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges