Question 1

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

The answer of Gil's office building (basis of $225,000 and...

Question 2

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

According to the IRS regulations, when real estate is exchanged for other real estate, and none of the realized gain is recognized, the adjusted basis of the new real estate is a carryover basis. This means that Terry's holding period for the new real estate begins on the date when they acquired the original real estate, which is August 25, 2011.

Question 3

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

The recognized gain in a like-kind exchange is calculated as the difference between the fair market value of the property given up and the adjusted basis of that property, not including any cash received. In this case, the recognized gain would be $10,000 ($25,000 - $15,000) and the adjusted basis for the property received would be $19,000.

Question 4

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 correct definition of involuntary conversion.

Question 5

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 6

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 actually $200,000 (($900,000 - $700,000) adjusted basis of the office building). Therefore, her basis for the apartment building would be $1,000,000 ($900,000 fair market value of the apartment building + $100,000 cash received - $200,000 recognized gain).

Question 7

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 8

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 Internal Revenue Service (IRS) allows taxpayers the option to defer any gains on involuntary conversions of property, so that they can reinvest the proceeds into similar property and thereby avoid any immediate tax liabilities. However, losses cannot be deferred under these circumstances.

Question 9

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

Accepted Answer

The answer of Casualty losses and condemnation losses on the...

Question 10

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 11

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 surrendered in a like-kind exchange is less than its adjusted basis, a loss may be recognized by the taxpayer. This loss may be used to offset gains from other transactions or deducted against ordinary income up to a certain limit. However, no loss can be recognized if the boot surrendered has a fair market value that is greater than its adjusted basis.

Question 12

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 13

Dennis,a calendar year taxpayer,owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2017.He receives insurance proceeds of $250,000 in January 2018.If before 2021,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

This is known as the involuntary conversion rule under Section 1033 of the Internal Revenue Code. If the taxpayer replaces the destroyed property with a similar property within a certain time period and for a similar cost, they can postpone recognizing any gain on the insurance proceeds.

Question 14

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

The holding period of replacement property includes the holding period of the involuntarily converted property, as stated in Section 1033 of the Internal Revenue Code.

Question 15

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 12,2017,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 2,2018.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

By electing § 1033, Sidney is able to postpone the gain from the insurance proceeds by reinvesting them in a new property used for the same business. Therefore, he has no recognized gain and his basis in the new building is reduced by the postponed gain of $150,000, resulting in a new basis of $450,000.

Question 16

If a taxpayer exchanges like-kind 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 answer of If a taxpayer exchanges like-kind property under...

Question 17

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. The amount realized refers to the total amount received by the taxpayer from the sale or exchange of property, but does not include any amount designated as severance damages by both the government and the taxpayer.

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 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 is referred to as a "like-kind exchange" under section 1033 of the Internal Revenue Code and allows for deferral of the realized gain until the replacement property is sold.

Question 20

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.

Quiz 13: Property Transactions: Determination of Gain or Loss, basis Considerations, and Nontaxable Exchanges