Question 1

The recognition of a loss realized on an involuntary conversion is mandatory.

Accepted Answer

According to IRS regulations, recognition of a loss realized on an involuntary conversion is mandatory. This is because an involuntary conversion typically involves the loss or destruction of property due to circumstances beyond the taxpayer's control, such as a natural disaster or government seizure. Therefore, the loss must be recognized and reported on the taxpayer's tax return.

Question 2

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

Accepted Answer

According to the IRS, in order for a nonrecognition transaction to be classified as a continuation of an investment, a qualified replacement asset is required. This means that the investor must acquire a new asset that meets certain criteria in order to defer recognition of any gains or losses from the original investment.

Question 3

The deferral of a gain realized on an involuntary conversion is mandatory.

Accepted Answer

The deferral of a gain realized on an involuntary conversion (such as property destroyed by a natural disaster and then replaced) is not mandatory; taxpayers can choose to report the gain or to defer recognition of the gain by reinvesting the proceeds into similar property within a specified period.

Question 4

Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory?
I.Involuntary conversion of business real estate.
II.Like-kind exchange of business real estate.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

In a like-kind exchange of business real estate, gain deferral is mandatory under IRC Section 1031. Involuntary conversions may allow for gain deferral, but it is not mandatory.

Question 5

Nancy purchased her houseboat six years ago for $35,000. She has lived in the houseboat since she purchased it. A friend has offered $62,000 for the houseboat. If she sells it, she will be able to exclude the gain.

Accepted Answer

Nancy meets the requirements for excluding the gain on the sale of a principal residence, which includes owning and using the property for at least 2 out of the last 5 years. As long as she meets these requirements and the profit from the sale is less than $250,000 (or $500,000 if filing jointly with a spouse), she can exclude the gain from her taxable income. In this case, the gain is $27,000 ($62,000 - $35,000), which is well within the exclusion limit.

Question 6

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in. As long as they file a joint return they can each claim a $250,000 exclusion.

Accepted Answer

This statement is true. When a married couple files a joint tax return, they can each claim up to a $250,000 exclusion on the sale of their primary residence as long as they meet certain criteria. This means that together they can exclude up to $500,000 of capital gains from the sale of their homes.

Question 7

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Accepted Answer

A gain on a like-kind exchange may be deferred or recognized depending on the presence or absence of boot (non-like-kind property received). If no boot is received, and the exchange meets all other requirements of Section 1031, the gain can be deferred. However, if boot is received, the gain recognized is limited to the lesser of the realized gain or the boot received.

Question 8

Which of the following can be income deferral transactions?
I.Sale of municipal bonds.
II.Involuntary conversions of property.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Involuntary conversions of property can lead to income deferral if the proceeds are reinvested in similar property, allowing the taxpayer to defer recognition of gain. Sale of municipal bonds does not typically involve income deferral; instead, it may involve tax-exempt income.

Question 9

In general, qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

Accepted Answer

Qualified replacement property for an involuntary conversion generally must be purchased within a period that begins one year before and ends two years after the close of the first tax year in which any part of the gain from the conversion is realized. However, for properties compulsorily or involuntarily converted as a result of certain presidentially declared disasters, the period is extended to four years.

Question 10

An involuntary conversion occurs whenever a loss (but not a gain) is realized from a transaction that occurs against the taxpayer's will.

Accepted Answer

An involuntary conversion can occur with both a loss and a gain; it refers to the process where property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and the proceeds are reinvested in similar property, not just to situations resulting in a loss.

Question 11

Which of the following can be income deferral transactions?
I.Exchanges of like-kind property.
II.Involuntary conversions of property.
​
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 exchanges of like-kind property and involuntary conversions of property are valid income deferral transactions. In both cases, the taxpayer is allowed to defer recognition of any gain on the transaction until a later date.

Question 12

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

Accepted Answer

According to the IRS, the holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset. This is stated in Section 1.1031(d)-1(c) of the Internal Revenue Code.

Question 13

A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh has a recognized gain of $50,000.
​
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 realized gain is calculated by subtracting the adjusted basis from the amount of money received from the insurance company, which gives us $550,000 - $500,000 = $50,000. Statement II is correct because the recognized gain is the portion of the realized gain that is subject to taxation, which in this case is $50,000. Since Josh used the cash to go to Hawaii and did not reinvest it in a similar business or use it to make capital improvements to the destroyed business, he cannot defer the tax on the recognized gain.

Question 14

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

Accepted Answer

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges under Internal Revenue Code Section 1031 if they meet certain time requirements for identifying properties and closing the transaction.

Question 15

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

Accepted Answer

The basis of replacement property in a nonrecognition transaction is generally the adjusted basis of the property given up, increased by any gain recognized on the transaction or decreased by any money received and any loss recognized.

Question 16

For related parties to qualify for a like-kind exchange, the property received must be held for six months.

Accepted Answer

The property received in a like-kind exchange must be held for investment or used in a trade or business, but there is no specific requirement for how long it must be held.

Question 17

A fire destroyed Jimmy's Teeshirt Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire. Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds.
I.Jimmy has a realized gain of $50,000.
II.Jimmy has a recognized gain of $50,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Jimmy has a realized gain of $50,000 because the insurance proceeds of $550,000 exceed the adjusted basis of $500,000. However, if he reinvests the insurance proceeds in a similar property (a new Teeshirt Shop), he may not have to recognize this gain for tax purposes, depending on specific tax regulations.

Question 18

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting. The exchange does not qualify as a like-kind exchange since the assets are personal.

Accepted Answer

Like-kind exchanges only apply to real property or certain types of personal property used for business or investment purposes. Cars used for personal use do not qualify for like-kind exchanges.

Question 19

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

Accepted Answer

When a nonrecognition transaction occurs, such as in a like-kind exchange or involuntary conversion, the recognition of gain or loss is deferred. The mechanism for deferral is through an adjustment of the replacement asset's basis, which is equal to the adjusted basis of the old asset plus any additional cash or liabilities assumed. This adjusted basis will determine the amount of gain or loss that will eventually be realized when the replacement asset is disposed of.

Question 20

When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Accepted Answer

This statement is true. Boot refers to additional nonqualifying property that is used to equalize the value of two qualified assets that are being exchanged. The use of boot in this manner does not disqualify the nonrecognition transaction.

Quiz 12: Non-Recognition Transactions

The recognition of a loss realized on an involuntary conversion is mandatory.

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

The deferral of a gain realized on an involuntary conversion is mandatory.

Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate.

Nancy purchased her houseboat six years ago for $35,000. She has lived in the houseboat since she purchased it. A friend has offered $62,000 for the houseboat. If she sells it, she will be able to exclude the gain.

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in. As long as they file a joint return they can each claim a $250,000 exclusion.

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property.

In general, qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

An involuntary conversion occurs whenever a loss (but not a gain) is realized from a transaction that occurs against the taxpayer's will.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property.

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000.

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

For related parties to qualify for a like-kind exchange, the property received must be held for six months.

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting. The exchange does not qualify as a like-kind exchange since the assets are personal.

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Quiz 12: Non-Recognition Transactions

The recognition of a loss realized on an involuntary conversion is mandatory.

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

The deferral of a gain realized on an involuntary conversion is mandatory.

Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate. ​

Nancy purchased her houseboat six years ago for $35,000. She has lived in the houseboat since she purchased it. A friend has offered $62,000 for the houseboat. If she sells it, she will be able to exclude the gain.

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in. As long as they file a joint return they can each claim a $250,000 exclusion.

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property. ​

In general, qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

An involuntary conversion occurs whenever a loss (but not a gain) is realized from a transaction that occurs against the taxpayer's will.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property. ​

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000. ​

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

For related parties to qualify for a like-kind exchange, the property received must be held for six months.

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting. The exchange does not qualify as a like-kind exchange since the assets are personal.

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property.

A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000.