Question 1

What is the general formula for calculating the adjusted basis of property?

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Question 2

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

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Question 3

Liz, age 55, sells her principal residence for $600,000. She purchased it 22 years ago for $175,000. Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000. Liz's objective is to minimize the taxes she must pay associated with the sale. Calculate her recognized gain.

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Question 4

If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, how is the excess allocated among the purchased assets?

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Question 5

Lucinda, a calendar year taxpayer, owned a rental property with an adjusted basis of $312,000 in a major coastal city. Her property was condemned by the city government on October 12, 2019. To build a convention center, Lucinda eventually received qualified replacement property from the city government on March 9, 2020. This new property has a fair market value of $410,000.
a. What is Lucinda's recognized gain or loss on the condemnation?
b. What is her adjusted basis for the new property?
c. If, instead of receiving qualifying replacement property, Lucinda was paid $410,000, what is the latest date that she can acquire qualifying replacement property?

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Question 6

If a taxpayer purchases taxable bonds at a premium, the amortization of the premium is elective. However, if a taxpayer purchases tax-exempt bonds at a premium, the amortization of the premium is mandatory. Explain this difference in the treatment.

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Question 7

Use the following data to determine the sales price of Toby's principal residence and the realized gain. He is not married. The sale of the old residence qualifies for the § 121 exclusion. $$\begin{array} { l r } 
\text { Selling expenses } & \$ 45,000 \
\text { Recognized gain } & 180,000 \
\text { Cost of new residence } & 760,000 \
\text { Adjusted basis of old residence } & 225,000 \
\S 121 \text { exclusion } & 250,000
\end{array}$$

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Question 8

For a corporate distribution of cash or other property to a shareholder, when does dividend income or a return of capital result?

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Question 9

Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000) from personal use to business use. Justin receives a building with a $40,000 fair market value ($50,000 donor's adjusted basis) from his mother as a gift. Discuss the tax consequences with respect to Joseph's and Justin's adjusted basis.

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Question 10

Patty's factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2019. Insurance proceeds of $500,000 are received on June 1, 2019. She has a new factory building constructed for $490,000, which she occupies on October 1, 2019. Assuming Patty's objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

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Question 11

For each of the following involuntary conversions, determine whether the property qualifies as replacement property.
a. Chuck's restaurant building is destroyed by fire. He clears the site and builds another restaurant building.
b. Diane's warehouse, which she used for storing inventory, is destroyed by a tornado. She purchases another warehouse in which she will store inventory.
c. Part of Andrew's dairy farm land is condemned to make way for an interstate highway. He uses the condemnation proceeds to construct a barn to be used for storing cattle feed.
d. Liz owns a shopping mall that is destroyed by a flood. Since the tenant occupancy rate was down, she uses the insurance proceeds to purchase an office building that she will rent to tenants.
e. Eleanor's Maserati Gran Turismo is stolen. The original cost was $125,000, and she had used it exclusively for personal use. Due to the limited supply of this model, it had appreciated in value. Eleanor received insurance proceeds of
$130,000 and uses the proceeds to purchase a replacement Gran Turismo.

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Question 12

Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.

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Question 13

On January 5, 2019, Warren sells his principal residence with an adjusted basis of $270,000 for $690,000. He has owned and occupied the residence for 15 years. He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale. One month before the sale, Warren painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000. On October 15, 2019, Warren purchases a new home for $600,000. On November 15, 2020, he pays $25,000 for completion of a new room on the house, and on January 14, 2021, he pays $15,000 for the construction of a pool. What is the Warren's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

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Question 14

Katrina, age 58, rented (as a tenant) the house that was her principal residence from January 1, 2019 through December 31, 2020. She purchased the house on January 1, 2021, for $150,000 and continued to occupy it through June 30, 2022. She leased it to a tenant from July 1, 2022, through December 31, 2023. On January 1, 2023, she sells the house for $350,000. She incurs a realtor's commission of $20,000. Calculate her recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire another residence.

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Question 15

Jake exchanges an airplane used in his business for a smaller airplane also to be used in his business. His adjusted ba
$325,000 and the fair market value is $310,000. The fair market value of the smaller airplane is $300,000. In addition, Jake receives cash of $10,000. Calculate Jake's realized and recognized gain or loss and his adjusted basis for the as

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Question 16

When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?

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Question 17

Maurice sells his personal use automobile at a realized loss. Under what circumstances can Maurice deduct the loss? What if the personal use asset was sold at a realized gain?

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Question 18

Evelyn's office building is destroyed by fire on July 12, 2019. The adjusted basis is $315,000. She receives insurance proceeds of $350,000 on August 31, 2019. Calculate the amount that Evelyn must reinvest in qualifying property so that her recognized gain be $20,000. Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion) postponement treatment.

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Question 19

Tara owns common stock in Taupe, Inc., with an adjusted basis of $250,000. She receives a preferred stock dividend which is nontaxable.
a. What effect does the preferred stock dividend have on Tara's adjusted basis of the common stock?
b. How is the basis of the preferred stock calculated?
c. What effect does the preferred stock dividend have on Tara's gross income?

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Question 20

Carlos, who is single, sells his personal residence on November 5, 2019, for $400,000. His adjusted basis was
$125,000. He pays realtor's commissions of $20,000. He had owned and occupied the residence for 12 years. Having decided that he no longer wants the burdens of home ownership, he invests the sales proceeds in a mutual fund and enters into a 1-year lease on an apartment. The detriments of renting, including a crying child next door, cause Carlos to rethink his decision. Therefore, he purchases another residence on November 6, 2020, for $275,000. Is Carlos eligible for exclusion of gain treatment under § 121 (exclusion of gain on sale of principal residence)? Calculate Carlos's recognized gain and his basis for the new residence.

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Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges