Question 1

Pat owns a 1965 Ford Mustang which 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

False

Question 2

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 3

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

Accepted Answer

The exchange of land for a warehouse qualifies for like-kind exchange treatment as both are considered real property. The fact that the warehouse is leased to a tenant for business purposes does not disqualify the exchange from being considered like-kind.

Question 4

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 5

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 6

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 7

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

In a like-kind exchange, the recognized gain is deferred and not immediately recognized. Therefore, Cole's recognized gain would be $0 and his adjusted basis for the property received would be $15,000 (the adjusted basis of the asset exchanged).

Question 8

Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.

Accepted Answer

The answer of Livestock of different sexes can qualify for...

Question 9

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.
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Accepted Answer

Leonore's recognized gain is calculated by subtracting the adjusted basis of the Pelican stock from the fair market value of the Blue Heron stock, which would be $50,000 in this case. Therefore, Leonore has realized a gain but is using the like-kind exchange provision of the tax code to defer the recognition of that gain. Her adjusted basis for the Blue Heron stock is not the same as the adjusted basis for the Pelican stock, but rather is calculated by taking the adjusted basis of the Pelican stock and allocating it among the Blue Heron stock and any boot (cash or other property) received in the exchange.

Question 10

Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business. If Clark is Kate's father, her realized gain of $150,000 must be recognized because they are related parties.

Accepted Answer

The answer of Kate exchanges land held as an investment...

Question 11

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 12

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

Accepted Answer

This is a key requirement of a § 1031 like-kind exchange. The taxpayer must defer recognizing gain on the exchange if they receive only like-kind property and no boot (cash or other property not like-kind). If the taxpayer receives boot, then the recognized gain cannot exceed the realized gain. Otherwise, the entire transaction may be subject to taxation.

Question 13

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 14

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 15

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 16

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 is less than the adjusted basis, the difference will be recognized as loss.

Question 17

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 18

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 19

Terry exchanges real estate (acquired on August 25, 2011) held for investment for other real estate to be held for investment on September 1, 2017. 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, 2011.

Accepted Answer

This is true because Terry's holding period for the new real estate begins on the date that he originally acquired the exchanged real estate. Additionally, because none of the realized gain is recognized, Terry's adjusted basis for the new real estate will be a carryover basis from the exchanged property.

Question 20

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

Accepted Answer

In a nontaxable exchange, recognition of gain or loss is postponed until a future taxable event, such as sale or disposition of the property received in the exchange. In a tax-free transaction, such as a like-kind exchange of real estate, the nonrecognition of gain or loss is permanent if certain requirements are met.

Quiz 15: Property Transactions: Nontaxable Exchanges