Question 1

In determining the basis of like-kind property received, postponed losses are:
A)Added to the basis of the old property.
B)Subtracted from the basis of the old property.
C)Added to the fair market value of the like-kind property received.
D)Subtracted from the fair market value of the like-kind property received.

Accepted Answer

Postponed losses are added to the fair market value of the like-kind property received to determine the basis of the new property. This adjustment ensures that the loss is not lost but is instead deferred until the new property is disposed of.

Question 2

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV that she will use exclusively in her business.This exchange qualifies for nontaxable exchange treatment.

Accepted Answer

Exchanging personal use property for business-use property does not qualify for nontaxable exchange treatment under Section 1031 of the Internal Revenue Code. Therefore, Abby may be subject to capital gains tax on the exchange.

Question 3

Joyce, a farmer, has the following events occur during the tax year.Which of the events qualifies for nonrecognition of gain from an involuntary conversion?
A)Her farm tractor is hauled to the city dump because it is worn out.
B)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement.
C)Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway.She recovers condemnation proceeds of $175,000.
D)She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.

Accepted Answer

Only option C qualifies for nonrecognition of gain from an involuntary conversion. Involuntary conversions happen when a property is taken away by force, such as condemnation of property. In such cases, the IRS allows non-recognition of any gain that may have been realized from the conversion. Options A and D do not qualify for non-recognition of gain because they are not involuntary conversions. Option B does not qualify for non-recognition of gain because it is a sale at a loss, not a conversion.

Question 4

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:
A)Recognized to the extent of the deficiency (amount realized not reinvested).
B)Recognized to the extent of realized gain.
C)Recognized to the extent of the amount reinvested in excess of the adjusted basis.
D)Permanently not subject to taxation.

Accepted Answer

Under § 1033, if the amount reinvested in replacement property is less than the amount realized, then the realized gain is recognized to the extent of the deficiency. Therefore, choice A is the correct answer.

Question 5

In October 2019, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange.Ben bought his real estate in 2008 while Jerry purchased his in 2011.In addition to the realty, Ben receives Pearl, Inc.stock worth $10,000 from Jerry.Ben's realized gain is $30,000.On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin?
A)2008, 2019.
B)2008, 2008.
C)2011, 2011.
D)2011, 2019.
E)None of the above.

Accepted Answer

In a like-kind exchange, the holding period for the property received includes the period the taxpayer held the property exchanged. Therefore, Ben's holding period for the realty begins in 2008. However, the holding period for the stock received begins on the date of the exchange, which is 2019.

Question 6

Moss exchanges a warehouse for a building he will use as an office building.The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000.In addition, Moss receives cash of $150,000.What is the recognized gain or loss and the basis of the office building?
A)$0 and $350,000.
B)$0 and $450,000.
C)($150,000) and $300,000.
D)($200,000) and $350,000.

Accepted Answer

The recognized gain is $0 because in a like-kind exchange, gain is not recognized unless cash is also received. The basis of the office building is $450,000, calculated as the adjusted basis of the warehouse ($600,000) minus the cash received ($150,000), since the fair market value of the office building is not directly relevant to the basis calculation in this context.

Question 7

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2019.On January 11, 2020, the insurance company paid the owner $450,000.The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss.The owner reinvested
$410,000 in a new office building on February 12, 2020, that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?
A)$0 and $320,000.
B)$0 and $410,000.
C)$40,000 and $320,000.
D)$130,000 and 410,000.

Accepted Answer

The recognized gain is $40,000, calculated as the insurance proceeds ($450,000) minus the reinvestment in the new building ($410,000). The basis of the new building is $320,000, which is the adjusted basis of the destroyed building, because under § 1033, the basis of the new property is the basis of the old property adjusted by the gain recognized or loss realized.

Question 8

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000.In addition, Pam receives $100,000 in cash.What is the recognized gain or loss and the basis of the investment land?
A)$0 and $420,000.
B)$100,000 and $420,000.
C)$100,000 and $520,000.
D)$280,000 and $700,000.

Accepted Answer

To calculate the recognized gain or loss, we need to compare the fair market value of the investment land ($700,000) with the adjusted basis of the rental building ($520,000). The difference is $180,000 ($700,000 - $520,000). However, Pam also received $100,000 in cash, so the recognized gain is reduced by that amount, leaving a recognized gain of $80,000 ($180,000 - $100,000).

To calculate the basis of the investment land, we start with the adjusted basis of the rental building ($520,000) and add the recognized gain ($80,000), for a total basis of $600,000 ($520,000 + $80,000).

Question 9

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of
$125,000).The property transfers were made subject to the mortgages.What amount of gain should Paula recognize?
A)$0
B)$25,000
C)$125,000
D)$175,000

Accepted Answer

In a like-kind exchange, Paula would recognize no gain if both properties are of like kind and the exchange is solely in kind. The fact that both properties are subject to equal mortgages ($125,000) means there's no relief of debt greater for one party over the other, which could otherwise trigger gain recognition. The exchange is treated as if Paula is trading her equity in her building ($250,000 adjusted basis minus $125,000 mortgage) for an equal value in Nick's building, making this a non-recognizable event for tax purposes.

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.

Accepted Answer

A § 1031 like-kind exchange can occur between real property held for productive use in a trade or business or for investment purposes for other real property held for productive use in a trade or business or for investment purposes. Therefore, option D, a business realty for investment realty exchange, qualifies for nonrecognition treatment. The other options do not qualify because they are not like-kind exchanges.

Question 11

Bud exchanges land with an adjusted basis of $22,000 and a fair market value of $30,000 for another parcel of land with a fair market value of $28,000 and $2,000 cash.What is Bud's recognized gain or loss?
A)$0
B)$2,000
C)$6,000
D)$8,000

Accepted Answer

To determine the recognized gain or loss in a like-kind exchange, we need to calculate the realized gain or loss and then adjust it for any boot received (cash or non-like-kind property) in the exchange.

Realized Gain or Loss = Fair Market Value of Property Received - Adjusted Basis of Property Given Up

In this case, the realized gain is:

$28,000 (FMV of property received) - $22,000 (Adjusted basis of property given up) = $6,000 realized gain

However, since there was boot received in the exchange, we need to adjust this gain:

Boot Received = $2,000 cash

The lesser of the realized gain or the boot received is the recognized gain or loss.

$2,000 (boot received) is less than $6,000 (realized gain), so the recognized gain is $2,000.

Therefore, the answer is B) $2,000.

Question 12

Molly exchanges land (adjusted basis of $85,000; fair market value of $78,000) used in her business and common stock held for investment (adjusted basis of $10,000; fair market value of $15,000) for a single parcel of land (fair market value of $93,000) to be used in her business in a like-kind exchange.What is Molly's recognized gain or loss?
A)$0
B)$5,000
C)($2,000)
D)($7,000)

Accepted Answer

The answer of Molly exchanges land (adjusted basis of $85,000;...

Question 13

Jared, a fiscal year taxpayer with a August 31 year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2019.If the insurance settlement was $950,000 (received March 1, 2020), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?
A)December 31, 2019.
B)August 31, 2020.
C)December 31, 2021.
D)August 31, 2022.

Accepted Answer

Under § 1033 of the Internal Revenue Code, a taxpayer has up to four years after the close of the first taxable year in which any part of the gain is realized to replace the property and qualify for nonrecognition of gain. Since Jared's property was destroyed in December 2019 and he is a fiscal year taxpayer with a year-end of August 31, the first taxable year in which the gain was realized closed on August 31, 2020. Therefore, Jared has until August 31, 2024, to replace the office building. However, since this option is not available, the closest correct answer provided is August 31, 2022, which is within the allowable replacement period.

Question 14

Dena owns 500 acres of farm land in southeastern Maryland.Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land.She exchanges the land for an office building owned by Chris in Newark, NJ.The building has a fair market value of $900,000.Chris assumes Dena's mortgage on the land.What is the amount of Dena's recognized gain or loss on the exchange?
A)$0
B)$400,000
C)$500,000
D)$820,000

Accepted Answer

To calculate the recognized gain or loss in the exchange, we need to compare the adjusted basis of the relinquished property (Dena's farm land) with the fair market value of the acquired property (Chris's office building).

Relinquished property (farm land):
Adjusted basis = $480,000
Mortgage on the land = $400,000

Therefore, the total value of the relinquished property is:
$480,000 + $400,000 = $880,000

Acquired property (office building):
Fair market value = $900,000

Since the fair market value of the acquired property ($900,000) is higher than the total value of the relinquished property ($880,000), there is no recognized gain for Dena. However, she will have to recognize the amount of the mortgage she is relieved of ($400,000) as gain. Therefore, the recognized gain for Dena is $400,000.

Question 15

Lily exchanges a building she uses in her rental business for a building owned by Kendall.She will use the building in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?
A)Lily's recognized gain is $50,000 and her basis for the building received is $120,000.
B)Lily's recognized gain is $50,000 and her basis for the building received is $170,000.
C)Lily's recognized gain is $0 and her basis for the building received is $120,000.
D)Lily's recognized gain is $0 and her basis for the building received is $170,000.

Accepted Answer

When a taxpayer exchanges property in a like-kind exchange, they can defer recognizing any gain or loss on the exchange. In this case, Lily exchanged her building with an adjusted basis of $120,000 for a building owned by Kendall. Since the fair market value of Kendall's building is not given, we cannot determine Lily's recognized gain or loss. However, Lily's basis for the building received will be the same as her basis in the building she gave up, which is $120,000. Therefore, the correct answer is C.

Question 16

Melvin receives stock as a gift from his uncle.No gift tax is paid.The adjusted basis of the stock is $30,000 and the fair market value is $38,000.Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash.What is his recognized gain and the basis for the bonds?
A)$0, $30,000.
B)$5,000, $33,000.
C)$5,000, $30,000.
D)$8,000, $35,000.

Accepted Answer

The answer of Melvin receives stock as a gift from...

Question 17

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000.What is the recognized gain or loss?
A)$0
B)$20,000
C)($20,000)
D)($25,000)

Accepted Answer

In a like-kind exchange, no gain or loss is recognized unless cash or other non-like-kind property (also known as "boot") is received. In this case, Maud receives $20,000 in cash, but because the fair market value of the property she gives up ($200,000) is more than the total fair market value of the property received ($180,000 plus $20,000 in cash = $200,000), there is no gain to be recognized. The entire transaction is treated as a like-kind exchange with no recognized gain or loss.

Question 18

Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000).Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium.Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000 in severance damages.Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 + $300,000) proceeds are invested in the stock market.What is her recognized gain or loss associated with the receipt of the severance damages?
A)$0
B)$100,000
C)$300,000
D)$340,000

Accepted Answer

Severance damages are treated as part of the compensation for the condemned property. Since Betty did not reinvest the proceeds in similar property and instead invested in the stock market, the entire amount received for the condemnation ($400,000) and the severance damages ($300,000) is considered in calculating the gain. However, the question specifically asks about the gain associated with the receipt of the severance damages, not the total gain from both the condemnation proceeds and the severance damages. The severance damages themselves do not directly result in a recognized gain or loss because they are part of the overall compensation for the condemnation, which is calculated against the basis of the property affected. The calculation of gain or loss would consider the entire proceeds ($700,000) against the basis of the condemned portion of the property and the impact on the remaining property, but the question's focus on the severance damages alone and their use does not directly lead to a recognized gain or loss without considering the broader context of the total compensation and its comparison to the basis of the affected property.

Question 19

Which of the following statements is correct?
A)In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
B)In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
C)In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
D)All of these.
E)None of these.

Accepted Answer

In a tax-free transaction, no gain or loss is recognized. Therefore, option A and B are incorrect. Option D is incorrect as option A is wrong. Option E is incorrect as there is a correct answer which is option C. In a tax-free transaction in which gain is realized, the taxpayer does not recognize the gain for tax purposes, but the taxpayer's cost or other basis for tax purposes is permanently increased by the amount of the gain avoided. Therefore, option C is correct.

Question 20

Nancy and Tonya exchanged assets.Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000.The house has a mortgage of $200,000, which is assumed by Tonya.Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000.What is Tonya's realized and recognized gain?
A)$310,000 realized and $310,000 recognized gain.
B)$310,000 realized and $0 recognized gain.
C)$110,000 realized and $110,000 recognized gain.
D)$110,000 realized and $0 recognized gain.

Accepted Answer

C)$110,000 realized and $110,000 recognized gain.Tonya's realized gain is calculated by subtracting her adjusted basis in the yacht ($250,000) from the fair market value of the house she received ($560,000) minus the mortgage assumed ($200,000), which equals $110,000. Since this is a like-kind exchange involving business and investment assets, the gain is recognized and taxed.

Quiz 15: Property Transactions: Nontaxable Exchanges

In determining the basis of like-kind property received, postponed losses are:

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV that she will use exclusively in her business.This exchange qualifies for nontaxable exchange treatment.

Joyce, a farmer, has the following events occur during the tax year.Which of the events qualifies for nonrecognition of gain from an involuntary conversion?

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) , makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000.In addition, Pam receives $100,000 in cash.What is the recognized gain or loss and the basis of the investment land?

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?

Bud exchanges land with an adjusted basis of $22,000 and a fair market value of $30,000 for another parcel of land with a fair market value of $28,000 and $2,000 cash.What is Bud's recognized gain or loss?

Lily exchanges a building she uses in her rental business for a building owned by Kendall.She will use the building in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?

Melvin receives stock as a gift from his uncle.No gift tax is paid.The adjusted basis of the stock is $30,000 and the fair market value is $38,000.Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash.What is his recognized gain and the basis for the bonds?

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000.What is the recognized gain or loss?

Which of the following statements is correct?