Question 1

The nonrecognition treatment on realized gains of an indirect involuntary conversion of a factory building under § 1033 is elective,while a like-kind exchange of computers under § 1031 is mandatory.

Accepted Answer

The statement is true. Nonrecognition treatment under § 1033 is elective, while a like-kind exchange under § 1031 is mandatory.

Question 2

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

Accepted Answer

The answer of To qualify for the § 121 exclusion,the...

Question 3

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

The basis of the replacement property will be its cost minus any deferred gain, not more than its cost. If the entire realized gain is recognized (no deferral), the basis of the replacement property is simply its cost, as there is no gain to defer and adjust the basis.

Question 4

If boot is received in a § 1031 like-kind 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 holding period for the like-kind property received in a § 1031 exchange tacks onto the holding period of the property exchanged (i.e., it continues from the original property's holding period), whereas the holding period for the boot received begins on the date of the exchange.

Question 5

Gabe's office building (adjusted basis of $430,000; fair market value of $500,000)is destroyed by a hurricane.Due to a 20% co-insurance clause,Gabe receives insurance proceeds of only $400,000.If Gabe purchases an office building for $500,000 one month later,its adjusted basis is $530,000 ($500,000 cost + $30,000 postponed loss).

Accepted Answer

The answer of Gabe's office building (adjusted basis of $430,000;...

Question 6

The taxpayer can elect to have the exclusion of gain under § 121 (sale of principal residence)not apply.

Accepted Answer

The taxpayer can choose not to apply the exclusion of gain under § 121, such as when they want to claim a loss on the sale of their principal residence or when they have used it as a rental property. However, once they elect to do so, they cannot change their decision.

Question 7

A condemned office building owned and used in the business by a taxpayer can be replaced by land and qualify for nonrecognition treatment.

Accepted Answer

According to Section 1033 of the Internal Revenue Code, if a condemned property is used for business or investment purposes and is replaced by similar property, then the taxpayer can take advantage of nonrecognition treatment. This can include replacement with land as long as it meets the criteria of being similar property.

Question 8

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

This statement accurately describes the rules for deferring the recognition of a realized gain from an involuntary conversion under the tax code. By reinvesting the net proceeds in qualifying replacement property within the prescribed time frame, a taxpayer can defer the recognition of the gain until a later date.

Question 9

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

This is because the gain can be reinvested into a similar property within a certain time frame, allowing for the gain to be postponed and not immediately recognized as taxable income. However, a loss on an involuntary conversion cannot be postponed and must be recognized immediately as a deductible loss.

Question 10

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

Accepted Answer

The answer of Under the taxpayer-use test for a §...

Question 11

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

Accepted Answer

Section 1033 primarily addresses the nonrecognition of gain for involuntary conversions, not losses. It allows taxpayers to defer recognition of gain if they reinvest the proceeds into similar property, but it does not specifically apply to losses in the same way.

Question 12

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 Internal Revenue Service (IRS).

Question 13

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 considered part of the amount realized in a transaction for tax purposes.

Question 14

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

Accepted Answer

The answer of At a particular point in time,a taxpayer...

Question 15

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

According to the IRS, the holding period of replacement property includes the holding period of the involuntarily converted property when the election to postpone gain is made. This means that the taxpayer can continue to defer the gain from the involuntarily converted property for tax purposes.

Question 16

Leta has a fiscal tax year which ends on June 30th.Her factory building is destroyed by a fire on October 12,2012.Two months later,she receives insurance proceeds large enough to produce a realized gain.In order to elect § 1033 postponement,Leta must acquire qualified replacement property by December 31,2014.

Accepted Answer

The answer of Leta has a fiscal tax year which...

Question 17

Terry exchanges real estate (acquired on August 25,2006)held for investment for other real estate to be held for investment on September 1,2012.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 25,2006.

Accepted Answer

When real estate is exchanged for other real estate to be held for investment and none of the realized gain is recognized, the adjusted basis for the new real estate is a carryover basis. Therefore, Terry's holding period for the new real estate begins on the date that the original real estate was acquired (in this case, August 25, 2006).

Question 18

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 answer of Milt's building which houses his retail sporting...

Question 19

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

Accepted Answer

According to § 1031, assuming a liability associated with the property received is considered Boot in a like-kind exchange. Therefore, if a taxpayer does so, they are considered to have given Boot in the transaction.

Question 20

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 or excluded as a § 121 sale of a principal residence.

Accepted Answer

If a taxpayer's principal residence is involuntarily converted due to a casualty, theft or condemnation, the realized gain may be postponed as a § 1033 involuntary conversion or excluded as a § 121 sale of a principal residence.

Quiz 15: Property Transactions: Nontaxable Exchanges