Question 1

Which of the following is/are correct regarding the sale of a principal residence?
I.A single taxpayer can only use the $250,000 exclusion once every 3 years.
II.Married taxpayers who both meet the ownership and use tests and file jointly can each exclude $250,000 of gain ($500,000 total)on the sale of their principal residence.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement II is correct according to the IRS rules. Married taxpayers who both meet the ownership and use tests and file jointly can each exclude $250,000 of gain ($500,000 total) on the sale of their principal residence. However, statement I is incorrect because there is no limit on the number of times a taxpayer can use the $250,000 exclusion on the sale of a principal residence.

Question 2

Which of the following statements is/are correct?
I.The carryover-holding period only applies if the property exchanged is personal-use property.
II.The holding period of like-kind property received includes the holding period of the property exchanged.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is incorrect because the carryover-holding period applies to all types of property, not just personal-use property. Statement II is correct because the holding period of the like-kind property received includes the holding period of the property exchanged.

Question 3

Carrie owns a business building with an adjusted basis of $95,000 and an appraised fair market value of $98,000.The city of Millerville condemns the property for a new highway.The condemnation award is $98,000.Carrie invests $90,000 of the proceeds into a new building on the other side of the city.What is the gain or loss that Carrie must recognize due to the transactions?
A)No gain or loss
B)$3,000 gain
C)$3,000 loss
D)$8,000 gain
E)$5,000 loss

Accepted Answer

The answer of Carrie owns a business building with an...

Question 4

Daisy's warehouse is destroyed by a tornado.The warehouse has an adjusted basis of $130,000 when destroyed.Daisy receives an insurance reimbursement check for $150,000 and immediately reinvests $120,000 of the proceeds in a new warehouse.What are Daisy's recognized gain or (loss)and her basis in the replacement warehouse?
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Recognized New
Gain (Loss)Basis
A)$ - 0 - $120,000
B)$20,000 $120,000
C)$30,000 $110,000
D)$10,000 $130,000
E)$20,000 $100,000

Accepted Answer

Daisy's recognized gain is $20,000 ($150,000 insurance reimbursement - $130,000 adjusted basis). Her basis in the new warehouse is $120,000 (amount reinvested).

Question 5

Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value of $185,000.The city of Springfield condemns the property for a new airport.The condemnation award is $185,000.Natural Power invests the $185,000 in a new warehouse on the other side of the city.What is the gain or loss that Natural Power Corporation must recognize due to the transactions?
A)No gain or loss
B)$10,000 gain
C)$10,000 loss
D)$185,000 gain

Accepted Answer

Since the condemnation award is only equal to the fair market value of the warehouse, there is no gain to recognize. However, since the adjusted basis of the warehouse is $195,000 and the condemnation award is only $185,000, Natural Power Corporation must recognize a loss of $10,000. This loss can be deducted on their tax return. The fact that they reinvested the award in a new warehouse is not relevant to the calculation of the gain or loss on the condemnation of the original warehouse.

Question 6

A flood destroys Owen's building that cost $100,000 in 2009,which has an adjusted basis of $80,000.Owen's insurance company reimburses him $125,000 for his loss.Owen promptly reconstructs the building for $115,000.What is the minimum amount of gain that Owen must recognize and his basis in the new building?
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Recognized New
Gain Basis
A)$-0- $80,000
B)$-0- $115,000
C)$10,000 $80,000
D)$10,000 $115,000
E)$10,000 $150,000

Accepted Answer

Owen's adjusted basis in the old building is $80,000. The insurance reimbursement of $125,000 exceeds the adjusted basis, so there is a gain of $45,000 ($125,000 - $80,000). Since Owen promptly reconstructs the building for $115,000, his basis in the new building is $115,000. However, he only needs to recognize a gain of $10,000 ($115,000 - $80,000 - $45,000) since the insurance reimbursement covers the remaining $35,000 of the gain. Therefore, the minimum amount of gain that Owen must recognize is $10,000 and his basis in the new building is $80,000 + $115,000 - $45,000 = $150,000. Option C is the correct choice.

Question 7

Which of the following is/are correct concerning a principal residence?
I.The maximum amount of gain a single taxpayer can exclude on the sale of a principal residence is $500,000.
II.To qualify for a $250,000 exclusion,a single taxpayer must have owned and used the property as a principal residence for at least 2 of the previous 5 years.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The maximum amount of gain a single taxpayer can exclude on the sale of a principal residence is $250,000, not $500,000. The $500,000 exclusion applies to married couples filing jointly. Statement II is correct as it accurately describes the ownership and use requirements to qualify for the exclusion.

Question 8

Which of the following is/are correct regarding involuntary conversions?
I.Gains may be deferred if the property involuntarily converted is replaced with property that is similar to or related in service or use to the converted property.
II.Deferral of gains is elective only if direct conversion is made into similar property.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is correct as according to Section 1033 of the Internal Revenue Code, gains can be deferred if the property involuntarily converted is replaced with property that is similar to or related in service or use to the converted property. However, statement II is incorrect as deferral of gains is not elective only if direct conversion is made into similar property.

Question 9

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition)treatment is
A)The date of the actual condemnation.
B)The date of the threat of condemnation.
C)Two years before the actual condemnation.
D)Two years before the threat of condemnation.
E)Three years after the date of the condemnation.

Accepted Answer

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition) treatment is the date of the threat of condemnation. This allows taxpayers to act in anticipation of a condemnation, recognizing that the process and its impact on property value can begin as soon as the threat is known.

Question 10

Which of the following qualify as replacement property under the involuntary conversion rules?
I.Mayfield Ice Cream Company's production plant is destroyed by a hurricane.The insurance proceeds are used to replace the plant with a refrigerated storage container.
II.Mayfield Ice Cream Company's production plant is destroyed by a fire.They sign a five year lease for a replacement production facility,and the insurance proceeds are then used to buy an office building
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Under the involuntary conversion rules, the replacement property must be similar or related in service or use to the property it replaces. Statement I does not qualify because a refrigerated storage container is not similar in service or use to a production plant. Statement II does not qualify because leasing a facility and using insurance proceeds to buy an office building does not meet the criteria for replacement property, as the purchased office building is not similar or related in service or use to the destroyed production plant.

Question 11

If related parties complete a qualified like-kind exchange,how long must the parties wait before disposing of the property exchanged to insure that any realized gain on the transfer is not recognized?
A)No waiting.
B)30 days.
C)6 months.
D)1 year.
E)2 years.

Accepted Answer

To ensure that any realized gain on the transfer is not recognized in a qualified like-kind exchange, the parties must wait at least 2 years before disposing of the property exchanged. This requirement is part of the guidelines to meet the criteria for a like-kind exchange under Section 1031 of the Internal Revenue Code, aiming to prevent abuse of the provision by quickly selling the property after the exchange.

Question 12

Which of the following is/are correct regarding the sale of a principal residence?
I.A taxpayer who is single and fails to meet the ownership or use test due to change in employment is entitled to a pro rata share of the $250,000 exclusion.
II.A single taxpayer can exclude up to $250,000 of the gain on the sale of a vacation home.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is correct because the IRS allows for a reduced exclusion on the gain of the sale of a principal residence if the sale is due to a change in employment, health, or unforeseen circumstances, and the taxpayer fails to meet the ownership or use test. Statement II is incorrect because the $250,000 exclusion applies only to the sale of a principal residence, not a vacation home.

Question 13

Violet exchanges investment real estate with Russell.Violet's adjusted basis in her two-year old property is $280,000.The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged.Russell assumes that debt.Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange.Russell pays Violet enough in cash to balance the exchange.What is Russell's recognized gain (loss)on the exchange?
A)$-0-
B)$70,000
C)$80,000
D)$150,000

Accepted Answer

In a like-kind exchange, if the properties exchanged have different values, the party with the higher-valued property typically has to pay cash or other property to equalize the values. In this case, Russell paid cash to balance the exchange. However, the amount of cash paid does not affect the calculation of recognized gain or loss.

To calculate recognized gain or loss, we need to compare Russell's adjusted basis in his old property ($80,000) with the fair market value of the property he received in the exchange ($150,000). Since his FMV is higher than his adjusted basis, he has a potential gain of $70,000 ($150,000 - $80,000). However, since this was a like-kind exchange, there is no recognized gain or loss. The gain is deferred until Russell sells the property he received in the exchange. Therefore, the answer is A) $-0-.

Question 14

Which of the following is/are correct concerning a principal residence?
I.A principal residence can be a house,condominium,mobile home,or houseboat.
II.A taxpayer can have more than one principal residence at a time.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is correct as a principal residence can be any of the mentioned types of dwelling. However, Statement II is incorrect as a taxpayer can only have one principal residence at a time according to tax laws.

Question 15

Charlotte's apartment building that has an adjusted basis of $200,000 is destroyed by fire.Early the following year,Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building.What is the basis in the new building?
A)$- 0 -
B)$425,000
C)$400,000
D)$200,000
E)$175,000

Accepted Answer

The basis in the new building is $200,000. This is because Charlotte reinvested the insurance proceeds in a similar property, and under the tax code, if you reinvest the proceeds from an involuntary conversion (like a fire) into similar property, you can defer recognizing the gain. Since she received $425,000 but reinvested $400,000, she is deferring the gain, and the basis of the new property becomes the adjusted basis of the old property, which is $200,000.

Question 16

Sarah exchanges investment real estate with Russell.Sarah's adjusted basis in her two-year old property is $280,000.The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged.Russell assumes that debt.Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange.Russell pays Sarah enough in cash to balance the exchange.What is Russell's basis in the new land?
A)$80,000
B)$180,000
C)$250,000
D)$320,000
E)None of the above

Accepted Answer

Russell's basis in the new land will be the total of his adjusted basis in the old property (which is $80,000) plus the cash paid to balance the exchange (which is $90,000), which equals $170,000. This is less than the fair market value of the new property, which is $320,000, so his basis will be the fair market value of the new property minus the amount of gain recognized (which is $320,000 - $170,000), or $150,000. Therefore, the correct answer is C.

Question 17

Which of the following is/are correct regarding the deferral of gain attributable to the involuntary conversion of personal property (personality)?
I.Gain deferral is mandatory.
II.Replacement property must be acquired within one year of the close of the tax year in which gain is realized from an involuntary property damage conversion.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Gain deferral for involuntary conversion of personal property is not mandatory; taxpayers can choose to recognize the gain. Additionally, the replacement period for property involuntarily converted is generally two years for personal property, not one year.

Question 18

Nancy acquired office equipment for her business three years ago at a cost of $15,000.During the current year,she exchanges the equipment for different equipment with a fair market value of $9,000.MACRS depreciation on the original equipment was $9,828.The exchange qualifies as a like-kind exchange.Immediately after the exchange Nancy sells the new equipment for $9,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$3,828 Section 1231 gain.
C)$3,828 Section 1245 ordinary income.
D)$6,000 Section 1245 ordinary income
E)$9,828 section 1245 ordinary income and $6,000 Section 1231 loss.

Accepted Answer

Since the exchange qualifies as a like-kind exchange, Nancy must use the adjusted basis of the original equipment as the basis for the new equipment. The adjusted basis of the original equipment is the original cost minus the accumulated depreciation, which in this case is $15,000 - $9,828 = $5,172. Since the fair market value of the new equipment received in the exchange is $9,000, Nancy has a realized gain of $3,828 ($9,000 - $5,172). This gain is treated as Section 1245 ordinary income because the original equipment was 5-year property under MACRS. When Nancy sells the new equipment for cash, she recognizes an additional $9,000 of ordinary income, resulting in a total recognized gain of $12,828.

Question 19

Which of the following qualify as replacement property under the involuntary conversion rules?
I.Smooth Yogurt Company's warehouse for storing its yogurt curds is condemned by the port authority.The warehouse will be replaced with a new office building in a neighboring community.
II.Smooth Yogurt Company's other warehouse,which was fully leased to another company,is destroyed by a tornado.The warehouse will be replaced with a rental office building adjacent to the company's new office building and will be leased to various tenants.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Both statements qualify as replacement property under the involuntary conversion rules. In both cases, the property was destroyed or condemned, and the company plans to replace it with a new building that will serve a similar business purpose. As long as the new property meets certain requirements, such as being of like-kind and being purchased within a certain time frame, it can qualify for tax deferral under the involuntary conversion rules.

Question 20

Norm acquired office equipment for his business at a cost of $10,000.After two years of use,Norm exchanges the equipment for different equipment with a fair market value of $7,000.MACRS depreciation on the original equipment was $4,753 The exchange qualifies as a like-kind exchange.Immediately after the exchange Norm sells the new equipment for $7,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$1,753 Section 1231 gain.
C)$1,753 Section 1245 ordinary income.
D)$4,753 Section 1231 gain.
E)$4,753 section 1245 ordinary income,and $3,000 Section 1231 loss.

Accepted Answer

The gain recognized is $1,753, which is the lesser of the depreciation taken ($4,753) or the realized gain ($7,000 - $5,247 adjusted basis). This gain is characterized as Section 1245 ordinary income.

Quiz 12: Nonrecognition Transactions

Which of the following statements is/are correct? I.The carryover-holding period only applies if the property exchanged is personal-use property. II.The holding period of like-kind property received includes the holding period of the property exchanged. ​

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition) treatment is

If related parties complete a qualified like-kind exchange,how long must the parties wait before disposing of the property exchanged to insure that any realized gain on the transfer is not recognized?

Which of the following is/are correct concerning a principal residence? I.A principal residence can be a house,condominium,mobile home,or houseboat. II.A taxpayer can have more than one principal residence at a time. ​

Charlotte's apartment building that has an adjusted basis of $200,000 is destroyed by fire.Early the following year,Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building.What is the basis in the new building?

Which of the following statements is/are correct? I.The carryover-holding period only applies if the property exchanged is personal-use property. II.The holding period of like-kind property received includes the holding period of the property exchanged.

Which of the following is/are correct concerning a principal residence? I.A principal residence can be a house,condominium,mobile home,or houseboat. II.A taxpayer can have more than one principal residence at a time.