Question 1

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Accepted Answer

There is a carryover holding period only if the taxpayer elects to postpone the recognition of gain on an involuntary conversion.For an involuntary conversion on which there is a realized loss,there is a new holding period.

Question 2

If a taxpayer exchanges like­kind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.

Accepted Answer

The assumption of a liability in a § 1031 like­kind exchange is considered to be boot given by the taxpayer.

Question 3

If boot is received in a § 1031 like­kind exchange that results in some of the realized gain being recognized,the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Accepted Answer

The boot received will have a new holding period (i.e. ,the date of the exchange).However,since only some of the realized gain is recognized,the like-kind property received will have a carryover holding period (i.e. ,includes the holding period for the like-kind property surrendered).

Question 4

If there is an involuntary conversion (i.e. ,casualty,theft,or condemnation)of the taxpayer's principal residence,the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence.

Accepted Answer

The taxpayer initially can elect to exclude the amount of realized gain allowed under Section 121.Then Section 1033 can be used to postpone the remainder of the realized gain associated with a qualified replacement.By using Section 121 first,the amount of the reinvestment needed under Section 1033 is reduced.

Question 5

Section 1033 (nonrecognition of gain from an involuntary conversion)applies to both gains and losses.

Accepted Answer

Section 1033 nonrecognition rules apply only to gains,not to losses.

Question 6

Under the taxpayer­use test for a § 1033 involuntary conversion,the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

Accepted Answer

A taxpayer has more flexibility under the taxpayer-use test than under the functional-use test.

Question 7

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency,the basis of the replacement property will be more than its cost (cost plus realized gain).

Accepted Answer

Since there would be no postponed gain in this case,the basis of replacement property would be its cost.

Question 8

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence)apply.

Accepted Answer

If the election to forgo the exclusion is not made,then the § 121 exclusion of gain will apply.

Question 9

At a particular point in time,a taxpayer can have two principal residences for § 121 exclusion purposes.

Accepted Answer

At a particular point in time,a taxpayer can have only one principal residence for § 121 exclusion purposes.Whether property is the taxpayer's principal residence depends upon all of the facts and circumstances in each case.If a taxpayer has two residences,the principal residence is the one he or she lives in most of the time.

Question 10

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

Accepted Answer

Casualty losses are recognized subject to the casualty loss limitations,while condemnation losses are not recognized (or postponed).

Question 11

Milt's building which houses his retail sporting goods store is destroyed by a flood.Sandra's warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood.Both Milt and Sandra receive insurance proceeds that result in a realized gain.Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Accepted Answer

The requirements for owner-investors (Sandra)are less restrictive than for owner-users (Milt).

Question 12

Terry exchanges real estate (acquired on August 25,2008)held for investment for other real estate to be held for investment on September 1,2014.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 25,2008.

Accepted Answer

There usually is a carryover holding period for the like-kind exchange property received.For this carryover holding period rule to apply in the case of like-kind exchanges after March 1,1954,the like­kind property surrendered must have been either a capital asset or § 1231 property.Therefore,Terry's holding period begins on August 25,2008.

Question 13

A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

Accepted Answer

For an indirect involuntary conversion,the postponement of the realized gain is elective.Losses on an indirect involuntary conversion of business property are recognized.

Question 14

An involuntary conversion results from the destruction (complete or partial),theft,seizure,requisition or condemnation,or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Accepted Answer

This is the definition of an involuntary conversion according to the IRS.

Question 15

To qualify for the § 121 exclusion,the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

Accepted Answer

At the date of the sale,the residence must have been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of sale.

Question 16

Sidney,a calendar year taxpayer,owns a building (adjusted basis $450,000)in Columbus,OH,in which he conducts his retail computer sales business.The building is destroyed by fire on December 12,2014,and two weeks later he receives insurance proceeds of $600,000.Due to family ties,Sidney decides to move to Columbia,SC.He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2,2015.By electing § 1033,Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost - $150,000 postponed gain).

Accepted Answer

Sidney satisfies both the replacement property and the time period requirements for a § 1033 involuntary conversion.

Question 17

If a taxpayer reinvests the net proceeds (amount received - related expenses)received in an involuntary conversion in qualifying replacement property within the statutory time period,it is possible to defer the recognition of the realized gain.

Accepted Answer

For § 1033 postponement of gain treatment to apply for an indirect (conversion into money)involuntary conversion,the taxpayer must elect § 1033 treatment.

Question 18

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Accepted Answer

The statement is true, as severance damages are not included in the amount realized.

Question 19

Gil's office building (basis of $225,000 and fair market value $275,000)is destroyed by a hurricane.Due to a 30% co-insurance clause,Gil receives insurance proceeds of $192,500 two months after the date of the loss.One month later,Gil uses the insurance proceeds to purchase a new office building for $275,000.His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Accepted Answer

Realized losses on involuntary conversions of business property are recognized.Thus,Gil has a recognized loss of $32,500 ($192,500 - $225,000),and his basis for the new office building is its cost of $275,000.

Question 20

Dennis,a calendar year taxpayer,owns a warehouse (adjusted basis of $190,000)which is destroyed by a tornado in October 2014.He receives insurance proceeds of $250,000 in January 2015.If before 2018,Dennis replaces the warehouse with another warehouse costing at least $250,000,he can elect to postpone the recognition of any realized gain.

Accepted Answer

All of the requirements for § 1033 deferral are satisfied.

Quiz 15: Property Transactions: Nontaxable Exchanges

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

If a taxpayer exchanges likekind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.

If boot is received in a § 1031 likekind exchange that results in some of the realized gain being recognized,the holding period for both the like-kind property and the boot received begins on the date of the exchange.

If there is an involuntary conversion (i.e. ,casualty,theft,or condemnation)of the taxpayer's principal residence,the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence.

Section 1033 (nonrecognition of gain from an involuntary conversion)applies to both gains and losses.

Under the taxpayeruse test for a § 1033 involuntary conversion,the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency,the basis of the replacement property will be more than its cost (cost plus realized gain).

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence)apply.

At a particular point in time,a taxpayer can have two principal residences for § 121 exclusion purposes.

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

An involuntary conversion results from the destruction (complete or partial),theft,seizure,requisition or condemnation,or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

To qualify for the § 121 exclusion,the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

If a taxpayer reinvests the net proceeds (amount received - related expenses)received in an involuntary conversion in qualifying replacement property within the statutory time period,it is possible to defer the recognition of the realized gain.

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Quiz 15: Property Transactions: Nontaxable Exchanges

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

If a taxpayer exchanges like­kind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.

If boot is received in a § 1031 like­kind exchange that results in some of the realized gain being recognized,the holding period for both the like-kind property and the boot received begins on the date of the exchange.

If there is an involuntary conversion (i.e. ,casualty,theft,or condemnation)of the taxpayer's principal residence,the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence.

Section 1033 (nonrecognition of gain from an involuntary conversion)applies to both gains and losses.

Under the taxpayer­use test for a § 1033 involuntary conversion,the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency,the basis of the replacement property will be more than its cost (cost plus realized gain).

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence)apply.

At a particular point in time,a taxpayer can have two principal residences for § 121 exclusion purposes.

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

An involuntary conversion results from the destruction (complete or partial),theft,seizure,requisition or condemnation,or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

To qualify for the § 121 exclusion,the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

If a taxpayer reinvests the net proceeds (amount received - related expenses)received in an involuntary conversion in qualifying replacement property within the statutory time period,it is possible to defer the recognition of the realized gain.

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

If a taxpayer exchanges likekind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.

If boot is received in a § 1031 likekind exchange that results in some of the realized gain being recognized,the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Under the taxpayeruse test for a § 1033 involuntary conversion,the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.