Question 1

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?
A) Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received.
B) Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received.
C) Fair market value of like-kind property received - postponed gain.
D) Only a. and c.
E) None of the above.

Accepted Answer

In a § 1031 like-kind exchange, if boot is received and gain is recognized, the basis for the like-kind property received can be calculated using either of the following formulas:
1. Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received.
2. Fair market value of like-kind property received - postponed gain.
Therefore, choice D "Only a. and c." is the correct answer as it includes the correct formula for calculating the basis for like-kind property received in this scenario.

Question 2

In October 2017, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2006 while Jerry purchased his in 2009. 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)2006, 2017.
B)2006, 2006.
C)2009, 2009.
D)2009, 2017.
E)None of the above.

Accepted Answer

In a § 1031 like-kind exchange, the holding period for the property received includes the holding period of the property given up. Therefore, Ben's holding period for the realty received from Jerry begins in 2006. However, the holding period for the stock received begins on the date of the exchange, which is 2017.

Question 3

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?
A) If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building to be used to sell inventory.
B) If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to be used in the taxpayer's business.
C) If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer's business.
D) Only b. and c.e. a., b., and c.

Accepted Answer

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

Question 4

Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (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)
E)None of the above

Accepted Answer

The answer of Molly exchanges a small machine (adjusted basis...

Question 5

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 under threat of condemnation, and includes reimbursement from insurance or other sources. Option C is the only event that qualifies as an involuntary conversion because her personal residence is condemned by the government for a public purpose, and Joyce receives condemnation proceeds. Options A and B do not qualify because they are not triggered by an involuntary event, and Option D does not involve a loss of property.

Question 6

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017. On January 11, 2018, 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, 2018, 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 recognized gain is the insurance proceeds ($450,000) minus the reinvestment ($410,000), which is $40,000. The basis of the new building is the cost of the new building ($410,000) minus the unrecognized gain ($90,000), which results in a basis of $320,000.

Question 7

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2018. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020. 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

Sam's recognized gain on receipt of the condemnation award is calculated as follows:
Condemnation award - Adjusted basis = Recognized gain
$875,000 - $750,000 = $125,000
However, $30,000 of the recognized gain can be deferred because Sam plans to reinvest the condemnation award in a new office building. This means Sam will only recognize $95,000 of gain in the current year.
Sam's basis for the new office building is calculated as follows:
Cost of new building - Deferred gain = Basis
$845,000 - $30,000 = $815,000
Since Sam's objective is to minimize gain recognition, he should defer as much gain as possible by reinvesting the condemnation award in a new building. Therefore, the best choice is B) $30,000; $750,000.

Question 8

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.
E)None of the above.

Accepted Answer

The answer of In determining the basis of like-kind property...

Question 9

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

The exchange of personal-use property for business-use property does not qualify for nontaxable exchange treatment. The fair market value of the SUV held for personal use would be considered part of the taxable exchange.

Question 10

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, 2017. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2017. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2019.
B)Heather's personal residence is destroyed by fire on October 31, 2017. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2017. She purchases another principal residence with the proceeds on October 31, 2019.
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, 2017. 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, 2020.
D)Lizzy's business automobile is destroyed in an accident on October 31, 2017. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2017. She purchases another business automobile with the proceeds on June 1, 2020.
E)All of the above.

Accepted Answer

All of the choices satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion. The requirement is that the taxpayer must acquire the replacement property within two years after the end of the tax year in which the gain is realized. In all of the choices, the taxpayer acquired the replacement property within two years after the end of the tax year in which the gain was realized.

Question 11

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)...

Question 12

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 under § 1033 and reinvests more than the amount realized, the basis of the replacement property is the cost of the property minus the postponed gain. This is because the postponed gain is not recognized, so it is essentially treated as a reduction in the cost of the replacement property. Therefore, choice C is the correct answer.

Question 13

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

Under § 1033, if the taxpayer makes the election to defer gain recognition from an involuntary conversion and reinvests in replacement property that is of like kind and equal or greater value, the realized gain is deferred. However, if the amount reinvested is less than the amount realized, the realized gain is only deferred to the extent of the deficiency, and this amount is recognized in the year of the conversion. Therefore, answer choice A is correct as it reflects the partial recognition of the gain to the extent of the deficiency.

Question 14

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, 2017. If the insurance settlement was $950,000 (received March 1, 2018), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?
A)December 31, 2017.
B)August 31, 2018.
C)December 31, 2019.
D)August 31, 2020.
E)None of the above.

Accepted Answer

Under § 1033, a taxpayer has two years after the close of the first tax year in which any part of the gain is realized to replace the property. Since Jared's fiscal year ends on August 31, 2018, he has until August 31, 2020, to replace the office building.

Question 15

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 16

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 17

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

In this scenario, it is considered that Paula exchanged her property for property of equal or greater value. Therefore, she is not required to recognize any gain or loss on the exchange. The fact that the properties were subject to mortgages does not affect this determination.

Question 18

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, New Jersey. 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
E)None of the above

Accepted Answer

In a like-kind exchange, the amount of gain or loss recognized is equal to the lesser of the realized gain (the fair market value of the property received minus the adjusted basis of the property given up) or the amount of boot received (cash or other property). In this case, the fair market value of the office building received is $900,000 and Dena's adjusted basis in the farm land is $480,000, resulting in a realized gain of $420,000. Since Chris assumed Dena's mortgage on the land, this is considered boot received by Dena in the exchange. The amount of boot received is $400,000, which is less than the realized gain of $420,000. Therefore, Dena's recognized gain is $400,000.

Question 19

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 determine the realized gain or loss, which is the insurance proceeds received compared to the adjusted basis:
$390,000 insurance proceeds - $400,000 adjusted basis = ($10,000) realized loss
The next step is to determine the recognized gain or loss, which is the lesser of the realized loss or the difference between the cost of the new building and the adjusted basis of the old building. In this case, the cost of the new building is greater than the adjusted basis of the old building, so the recognized loss is equal to the realized loss:
Recognized loss = ($10,000)
Finally, the basis of the new building is equal to the cost of construction plus any recognized gain (or minus any recognized loss), which in this case is:
$450,000 cost of construction - $10,000 recognized loss = $440,000 basis of new building.

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.
E)None of the above.

Accepted Answer

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

Quiz 15: Property Transactions: Nontaxable Exchanges

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?

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) ?

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 which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.

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?

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?

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:

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:

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