Question 1

Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000).In addition, he receives cash of $6,000.If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000, and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).

Accepted Answer

The exchange does not qualify as a like-kind exchange because Cole received cash in addition to the other asset. Therefore, he must recognize the full $10,000 gain ($25,000 - $15,000) on the exchange. His adjusted basis for the property received would be $19,000 (fair market value of the property received).

Question 2

In a nontaxable exchange, recognition is postponed.In a tax-free transaction, nonrecognition is permanent.

Accepted Answer

In a nontaxable exchange, the recognition of gain or loss is postponed, meaning it may be recognized at a later date. In a tax-free transaction, nonrecognition is permanent, meaning the gain or loss is never recognized for tax purposes.

Question 3

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 4

Terry exchanges real estate (acquired on August 25, 2013) held for investment for other real estate to be held for investment on September 1, 2019.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, 2013.

Accepted Answer

When real estate held for investment is exchanged for other real estate held for investment, under Section 1031 of the Internal Revenue Code, any realized gain is not recognized and the adjusted basis of the new property is the carryover basis from the old property. Additionally, the holding period of the new property is considered to have begun on the same date as the old property.

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

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 7

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 8

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 9

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 10

Pat owns a 1965 Ford Mustang that 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

Pat's recognized gain is $5,000 (the difference between the Mustang's current value of $27,000 and its purchase price of $22,000). His adjusted basis for the convertible would be $27,000, the value of the Triumph Spitfire convertible he received in the exchange.

Question 11

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 12

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

Leonore's recognized gain is the difference between the fair market value of the Blue Heron stock and the adjusted basis of the Pelican stock, which is $50,000 ($350,000 - $300,000). Therefore, her recognized gain is not zero, and her adjusted basis for the Blue Heron stock is not equal to her adjusted basis for the Pelican stock.

Question 13

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 14

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 boot surrendered in a like-kind exchange is less than its adjusted basis, a loss may be recognized by the taxpayer. This loss may be used to offset gains from other transactions or deducted against ordinary income up to a certain limit. However, no loss can be recognized if the boot surrendered has a fair market value that is greater than its adjusted basis.

Question 15

Lola owns land as an investor.She exchanges the land for a warehouse that she leases to a tenant who uses it to store his business inventory.The exchange qualifies for like-kind exchange treatment.

Accepted Answer

The exchange between Lola's land and the warehouse qualifies for like-kind exchange treatment because both properties are being used for investment or business purposes.

Question 16

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

Accepted Answer

This is a rule of § 1031 exchanges, which states that if boot is received in the exchange (i.e. cash, property, or other non-like-kind property), the recognized gain cannot exceed the realized gain. In other words, the amount of gain that is recognized for tax purposes cannot be greater than the amount of gain that was realized in the exchange.

Question 17

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 18

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 19

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

As long as both properties are held for productive use in a trade or business or for investment purposes, they can qualify as like-kind properties regardless of their locations.

Question 20

If a taxpayer exchanges like-kind property 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 and...

Quiz 15: Property Transactions: Nontaxable Exchanges