Question 1

A factory building owned by Amber,Inc.is destroyed by a hurricane.The adjusted basis of the building was $400,000 and the appraised value was $425,000.Amber receives insurance proceeds of $390,000.A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000.What is the recognized gain or loss and what is the basis of the new factory building?
A)$0 and $450,000.
B)$0 and $460,000.
C)($10,000)and $440,000.
D)($10,000)and $450,000.
E)None of the above.

Accepted Answer

The first step is to calculate the adjusted basis before the hurricane:
Adjusted basis = $400,000

Next, we calculate the realized loss:
Realized loss = adjusted basis - insurance proceeds
Realized loss = $400,000 - $390,000
Realized loss = $10,000

Since a new factory building was constructed, we need to calculate the basis of the new building:
Basis of new building = cost of construction
Basis of new building = $450,000

Lastly, we need to determine the recognized gain or loss:
Recognized gain or loss = realized loss - any gain recognized on the replacement property
In this case, there is no gain recognized on the replacement property since the cost of construction exceeds the insurance proceeds.

Therefore, the recognized gain or loss is ($10,000) and the basis of the new factory building is $450,000, making choice D the correct answer.

Question 2

During 2016,Howard and Mabel,a married couple,decided to sell their residence.The residence has a basis of $162,000 and has been owned and occupied by them for 11 years.The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000.They purchased a new residence in June for $400,000.What is the adjusted basis of the new residence?
A)$0
B)$141,000
C)$162,000
D)$191,000
E)None of the above

Accepted Answer

The answer of During 2016,Howard and Mabel,a married couple,decided to...

Question 3

Jared,a fiscal year taxpayer with a August 31st year-end,owns an office building (adjusted basis of $800,000)that was destroyed by fire on December 24,2016.If the insurance settlement was $950,000 (received March 1,2017),what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?
A)December 31,2016.
B)August 31,2017.
C)December 31,2018.
D)August 31,2019.
E)None of the above.

Accepted Answer

Jared has until the due date (including extensions) of his tax return for the tax year in which the insurance proceeds were received to replace the destroyed property in order to qualify for nonrecognition of gain under § 1033. Since the insurance proceeds were received on March 1, 2017, the latest date Jared can replace the office building would be August 31, 2019 (the due date of Jared's 2017 tax return including extensions). Therefore, the correct answer is D.

Question 4

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

Accepted Answer

Exchanging personal property for business property does not qualify for nontaxable exchange treatment. The $24,000 cash being exchanged also suggests that this is a taxable transaction.

Question 5

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30,2016.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1,2017.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31,2019.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?
A)$0;$720,000.
B)$30,000;$750,000.
C)$30,000;$845,000.
D)$150,000;$750,000.
E)None of the above.

Accepted Answer

To calculate Sam's recognized gain on receipt of the condemnation award, we need to compare the condemnation award to the adjusted basis of the property.

Adjusted basis = $750,000

Condemnation award = $875,000

Recognized gain = Condemnation award - Adjusted basis = $875,000 - $750,000 = $125,000

However, Sam can potentially defer this gain by reinvesting the proceeds into a new qualifying property. To do this, Sam must follow the rules of IRS Code Section 1033.

Sam built a new office building at a cost of $845,000, which exceeds the condemnation award of $875,000. Therefore, Sam has fully reinvested the proceeds and can defer the recognized gain of $125,000.

The basis for the new office building is equal to the cost of the property, which is $845,000.

Question 6

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion)and the amount reinvested in replacement property exceeds the amount realized,the basis of the replacement property is:
A)The cost of the replacement property.
B)The fair market value of the involuntarily converted property minus the postponed gain.
C)The cost of the replacement property minus the postponed gain.
D)The amount realized.
E)None of the above.

Accepted Answer

When a taxpayer qualifies for non-recognition of gain under § 1033, the basis of the replacement property is the cost of the replacement property minus the postponed gain. This is because the taxpayer is deemed to have recognized gain on the involuntary conversion, but is able to defer recognition by reinvesting the proceeds into a qualifying replacement property. Therefore, the basis of the replacement property is reduced by the amount of gain that was deferred, which is referred to as the postponed gain.

Question 7

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?
A)An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.
B)The postponement of realized gain in a § 1033 involuntary conversion is elective.
C)The functional use test is satisfied if a business warehouse is replaced with another business warehouse.
D)The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.
E)All of the above are correct.

Accepted Answer

The answer of Which of the following statements is correct...

Question 8

Myrna's personal residence (adjusted basis of $100,000)was condemned,and she received a condemnation award of $80,000.Myrna used the condemnation proceeds to purchase a new residence for $90,000.What is her recognized gain or loss and her basis in the new residence?
A)$0;$70,000.
B)$0;$90,000.
C)($20,000);$90,000.
D)($20,000);$70,000.
E)None of the above.

Accepted Answer

The answer of Myrna's personal residence (adjusted basis of $100,000)was...

Question 9

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30,2016.On January 11,2017,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 12,2017,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.
E)None of the above.

Accepted Answer

The answer of An office building with an adjusted basis...

Question 10

Evelyn,a calendar year taxpayer,lists her principal residence with a realtor on February 7,2016,enters into a contract to sell on July 12,2016,and sells (i.e. ,the closing date)the residence on August 1,2016.The realized gain on the sale is $225,000.Which date is the appropriate ending date in determining if the residence has been owned and used by the Evelyn as the principal residence for at least two years during the prior five-year period?
A)February 7,2016.
B)July 12,2016.
C)August 1,2016.
D)December 31,2016.
E)None of the above.

Accepted Answer

The appropriate ending date is the date of sale or August 1, 2016 in this case. This is because the requirement is to have used the residence as the principal residence for at least two years during the five-year period prior to the sale, and August 1, 2016, is within that five-year period. The other dates, including February 7, 2016 (listing date), July 12, 2016 (contract date), and December 31, 2016 (calendar year end), do not have any bearing on the length of time the residence was used as the principal residence by Evelyn.

Question 11

Fran was transferred from Phoenix to Atlanta.She sold her Phoenix residence (adjusted basis of $250,000)for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000.Fran had owned and lived in the Phoenix residence for 6 years.What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?
A)$0 and $375,000.
B)$0 and $425,000.
C)($50,000)and $325,000.
D)($50,000)and $375,000.
E)None of the above.

Accepted Answer

The answer of Fran was transferred from Phoenix to Atlanta.She...

Question 12

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.
E)None of the above.

Accepted Answer

The answer of Nancy and Tonya exchanged assets.Nancy gave Tonya...

Question 13

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion)involuntary conversion?
A)Al's business warehouse is destroyed by a tornado on October 31,2016.Al is a calendar year taxpayer.He receives insurance proceeds on December 5,2016.He reinvests the proceeds in another warehouse to be used in his business on December 29,2018.
B)Heather's personal residence is destroyed by fire on October 31,2016.She is a calendar year taxpayer.She receives insurance proceeds on December 5,2016.She purchases another principal residence with the proceeds on October 31,2018.
C)Mack's office building is condemned by the city as part of a road construction project.The date of the condemnation is October 31,2016.He is a calendar year taxpayer.He receives condemnation proceeds from the city on that date.He purchases another office building with the proceeds on December 5,2019.
D)Lizzy's business automobile is destroyed in an accident on October 31,2016.Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th.She receives insurance proceeds on December 5,2016.She purchases another business automobile with the proceeds on June 1,2019.
E)All of the above.

Accepted Answer

The answer of Which of the following satisfy the time...

Question 14

During 2016,Zeke and Alice,a married couple,decided to sell their residence,which had a basis of $200,000.They had owned and occupied the residence for 20 years.To make it more attractive to prospective buyers,they had the inside painted in April at a cost of $5,000 and paid for the work immediately.They sold the house in May for $800,000.Broker's commissions and other selling expenses amounted to $50,000.They purchased a new residence in July for $400,000.What is the recognized gain and the adjusted basis of the new residence?
A)$45,000 and $400,000.
B)$50,000 and $400,000.
C)$100,000 and $600,000.
D)$550,000 and $800,000.
E)None of the above.

Accepted Answer

The answer of During 2016,Zeke and Alice,a married couple,decided to...

Question 15

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.
E)None of the above.

Accepted Answer

If the taxpayer qualifies under § 1033 and makes the election, any realized gain is deferred as long as the amount reinvested in replacement property is equal to or greater than the amount realized. If the amount reinvested is less than the amount realized, the realized gain is recognized to the extent of the deficiency (amount realized not reinvested). Therefore, option A is the correct choice.

Question 16

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
E)None of the above

Accepted Answer

The answer of On October 1,Paula exchanged an apartment building...

Question 17

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
E)None of the above

Accepted Answer

The answer of Betty owns a horse farm with 500...

Question 18

During 2016,Ted and Judy,a married couple,decided to sell their residence,which had a basis of $300,000.They had owned and occupied the residence for 20 years.To make it more attractive to prospective buyers,they had the outside painted in April at a cost of $6,000 and paid for the work immediately.They sold the house in May for $880,000.Broker's commissions and other selling expenses amounted to $53,000.Since they both are age 68,they decide to rent an apartment.They purchase an annuity with the net proceeds from the sale.What is the recognized gain?
A)$0
B)$17,000
C)$27,000
D)$527,000
E)None of the above

Accepted Answer

To calculate the recognized gain, we need to first calculate the amount realized, which is the sale price minus selling expenses:

Amount realized = $880,000 - $53,000 = $827,000

Next, we need to calculate the adjusted basis, which is the original basis plus any improvements made:

Adjusted basis = $300,000 + $6,000 = $306,000

The recognized gain is then the amount realized minus the adjusted basis:

Recognized gain = $827,000 - $306,000 = $521,000

However, since Ted and Judy are both over 65 years old and have owned and occupied the residence for at least 2 out of the past 5 years, they can exclude up to $500,000 of the gain on the sale of the residence. Since their recognized gain is only $521,000, they can exclude the entire amount and the recognized gain is $0.

Question 19

Carl sells his principal residence,which has an adjusted basis of $150,000 for $200,000.He incurs selling expenses of $20,000 and legal fees of $2,000.He had purchased another residence one month prior to the sale for $380,000.What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?
A)$0 and $380,000.
B)$0 and $408,000.
C)$28,000 and $352,000.
D)$28,000 and $380,000.
E)None of the above.

Accepted Answer

The answer of Carl sells his principal residence,which has an...

Question 20

Joyce,a farmer,has the following events occur during the tax year.Which of the events qualify as an involuntary conversion under § 1033 (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.
E)None of the above.

Accepted Answer

An involuntary conversion occurs when property is destroyed, stolen, condemned, or disposed of due to a natural disaster or government action, such as eminent domain. In this case, Joyce's personal residence was condemned to make way for an interstate highway, which qualifies as an involuntary conversion under § 1033. The recovery of $175,000 in condemnation proceeds may be eligible for nonrecognition of gain if the funds are reinvested in similar property within a specified time frame. None of the other events qualify as an involuntary conversion under § 1033 because they were not due to a natural disaster or government action.

Quiz 15: Property Transactions Nontaxable Exchanges

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

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized,the basis of the replacement property is:

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

Myrna's personal residence (adjusted basis of $100,000) was condemned,and she received a condemnation award of $80,000.Myrna used the condemnation proceeds to purchase a new residence for $90,000.What is her recognized gain or loss and her basis in the new residence?

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) 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:

Joyce,a farmer,has the following events occur during the tax year.Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion) ?