Question 1

If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

Accepted Answer

In a §1031 like-kind exchange, any boot received will trigger realized gain and potentially recognized gain, but the recognized gain cannot exceed the realized gain.

Question 2

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 3

To qualify as a like-kind exchange, real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.

Accepted Answer

To qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, real property must be exchanged for other real property of a like kind, which can be used for business or investment purposes. Personal property no longer qualifies for like-kind exchanges after the Tax Cuts and Jobs Act of 2017.

Question 4

Pat owns a 1965 Ford Mustang which he uses for personal use. He purchased it four years ago for $22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000. Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

Accepted Answer

Pat's recognized gain is $0 because it is a like-kind exchange, but his adjusted basis for the convertible should be $27,000, the fair market value of the Triumph Spitfire, not the original purchase price of the Mustang.

Question 5

A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.

Accepted Answer

Under U.S. tax law, properties involved in a like-kind exchange must be located within the United States to qualify for like-kind exchange treatment.

Question 6

The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.

Accepted Answer

As long as both properties are held for productive use in a trade or business or for investment purposes, they can qualify as like-kind properties regardless of their locations.

Question 7

An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.

Accepted Answer

Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of like-kind property used in a trade or business or held for investment. However, it specifically excludes exchanges of inventory, stocks, bonds, notes, other securities, partnership interests, and certificates of trust. Personal property must be of the same general asset or product class to qualify as like-kind.

Question 8

Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment.

Accepted Answer

The exchange of land for a warehouse qualifies for like-kind exchange treatment as both properties are real estate and being used for investment purposes. The fact that the warehouse is being leased to a tenant for business purposes does not affect the eligibility for like-kind exchange treatment.

Question 9

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 10

Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock. Leonore's adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000. Leonore's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.

Accepted Answer

Leonore's recognized gain is the difference between the fair market value of the Blue Heron stock ($350,000) and her adjusted basis for the Pelican stock ($300,000), which is $50,000. Therefore, Leonore's recognized gain is not $0, and her adjusted basis for the Blue Heron stock is not $300,000. It would be $350,000, which is the fair market value of the Blue Heron stock.

Question 11

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 exchange does not qualify as a like-kind exchange because the fair market value of the asset received is less than the fair market value of the asset exchanged. Therefore, Cole must recognize a gain of $10,000 ($25,000 - $15,000 basis) on the exchange, in addition to the cash received.

Question 12

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 13

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 14

The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

Accepted Answer

Under § 1031, the nonrecognition of gains and losses is mandatory for both gains and losses when the transaction meets the requirements for a like-kind exchange.

Question 15

Terry exchanges real estate (acquired on August 25, 2012) held for investment for other real estate to be held for investment on September 1, 2018. 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, 2012.

Accepted Answer

When property is exchanged for like-kind property and certain requirements are met, any realized gain is not recognized for tax purposes and the basis in the new property is generally a carryover basis from the old property. Additionally, the holding period for the new property includes the holding period of the old property. Therefore, Terry's holding period for the new real estate would begin on August 25, 2012, the date the original real estate was acquired.

Question 16

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

The recognized gain should be calculated as the difference between the fair market value of the apartment building and the adjusted basis of the office building, which would be $200,000 ($900,000 - $700,000). Therefore, the basis for the apartment building should be $900,000 ($700,000 adjusted basis + $200,000 recognized gain).

Question 17

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 18

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 an involuntary conversion.

Question 19

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

When a depreciated boot is surrendered in a like-kind exchange, the adjusted basis of the property surrendered is compared to its fair market value. If the fair market value is less than the adjusted basis, the difference between the two constitutes a loss that can be recognized for tax purposes.

Question 20

Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business. If Clark is Kate's father, her realized gain of $150,000 must be recognized because they are related parties.

Accepted Answer

The exchange of property between related parties can qualify for non-recognition of gain under Section 1031 of the Internal Revenue Code, provided it meets the like-kind exchange requirements.

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