Question 1

Gil's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane.Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss.One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000.His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Accepted Answer

Gil's adjusted basis for the new building would be $225,000, not $307,500. This is because the basis of the new property is the cost of the new property ($275,000) minus the gain that was not recognized (postponed) due to the reinvestment of the insurance proceeds ($192,500 received - $225,000 basis of old property = -$32,500, but since this is a loss, not a gain, we do not reduce the basis of the new property by a loss). Therefore, the basis of the new property remains at its cost, $275,000, without any adjustment for a postponed loss, as the calculation provided incorrectly suggests an adjustment for a loss, not a gain.

Question 2

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, 2017, 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, 2018.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 is correct according to the rules of § 1033, where if a taxpayer reinvests the insurance proceeds into a property similar or related in use to the destroyed property, they can postpone the recognition of any gain. Sidney has done exactly that, and so has no recognized gain and a basis in the new building of $450,000.

Question 3

Owen and Polly have been married for five years.Owen sells investment property to Polly for a realized gain of $140,000.Owen's gain of $140,000 is not recognized and Polly's basis for the property she purchased is her cost.

Accepted Answer

The answer of Owen and Polly have been married for...

Question 4

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Accepted Answer

The Internal Revenue Code states that the holding period of the replacement property includes the holding period of the involuntarily converted property, as long as the replacement property is of a like-kind and is acquired within the allowed timeframe. This is important for determining the applicable capital gains tax rate and any potential tax consequences upon the sale of the replacement property.

Question 5

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain).

Accepted Answer

The basis of the replacement property will be its cost minus any deferred gain from the involuntary conversion, not more than its cost. If the recognized gain equals the realized gain due to a reinvestment deficiency, it means all gain is recognized and there's no deferred gain to adjust the basis of the replacement property upwards.

Question 6

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

Accepted Answer

This is the correct maximum amount for the § 121 gain exclusion.

Question 7

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.

Accepted Answer

The exclusion of gain under § 121 for the sale of a principal residence automatically applies; the taxpayer does not need to make an election for it to take effect.

Question 8

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions.

Accepted Answer

This is true. If a taxpayer's principal residence is destroyed in a fire, they can take advantage of both the § 121 exclusion (if they sell the property within 2 years of the event) and the § 1033 postponement of gain (if they reinvest the proceeds into a new property). However, the taxpayer cannot double-dip and exclude the same gain under both provisions.

Question 9

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 is known as a §1033 exchange, and it allows taxpayers to defer recognition of the realized gain if they reinvest the net proceeds in qualifying replacement property within the statutory time period.

Question 10

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?
A)Partnership interest for a partnership interest.
B)Inventory for inventory.
C)Securities for personalty.
D)Business realty for investment realty.
E)None of the above.

Accepted Answer

§ 1031 like-kind exchange allows for nonrecognition treatment of gain or loss when exchanging similar types of property used for business or investment purposes. Business realty for investment realty is a qualifying exchange because they are both real property used for investment purposes. None of the other choices qualify because they involve different types of property.

Question 11

A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.

Accepted Answer

A taxpayer cannot recognize a loss on the sale of their principal residence as it is considered a personal use asset. Only gains can be recognized up to certain limits.

Question 12

Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000.The adjusted basis is $64,000 and selling expenses are $22,000.She purchases another principal residence three months later for $200,000.Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.

Accepted Answer

Kelly qualifies for the exclusion of up to $250,000 of gain ($500,000 for married taxpayers filing jointly) on the sale of a principal residence because she owned and occupied the property for at least two out of the five years preceding the sale. Her recognized gain of $39,000 is less than the maximum exclusion amount, so she will not owe any taxes on the sale. Her basis for the new principal residence is the purchase price of $200,000.

Question 13

Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000.The adjusted basis is $140,000 and the selling expenses are $20,000.Three days after the sale he purchases another residence for $385,000.Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.

Accepted Answer

Matt qualifies for the principal residence exclusion, which allows him to exclude up to $250,000 of gain ($500,000 if married filing jointly) from the sale of his principal residence if he meets certain ownership and use tests. Since he owned and occupied the residence for 5 years, he meets these tests and can exclude the entire gain of $295,000 ($435,000 - $140,000 - $20,000). Because he purchased a new residence within 2 years of the sale, he meets the replacement property rules and his basis in the new residence is $385,000. Therefore, his recognized gain is $0 and the statement given in the question is false.

Question 14

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 15

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 16

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 tax purposes when property is involuntarily converted to cash or a similar form, and does not specifically apply to losses in the same way. Losses from involuntary conversions are generally treated under different tax rules.

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 true. 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.

Question 18

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 19

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2017.He receives insurance proceeds of $250,000 in January 2018.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 known as the involuntary conversion rule under Section 1033 of the Internal Revenue Code. If a taxpayer's property is destroyed or stolen and they receive an insurance payout, they have the option to reinvest the proceeds in a similar property and defer any gain recognition. The replacement property must be purchased within a certain time period and meet other requirements outlined in the tax code.

Question 20

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 a correct definition of an involuntary conversion.

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