Question 1

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 2

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2018. He receives insurance proceeds of $250,000 in January 2019. 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 an example of the involuntary conversion rule under section 1033 of the Internal Revenue Code. If Dennis replaces the destroyed warehouse with another similar property within a certain timeframe at a similar or higher cost, he can defer the recognition of any realized gain on the destruction of the warehouse. The insurance proceeds do not have to be reinvested in the new property, but can be used for other purposes.

Question 3

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 is true. By reinvesting the net proceeds in qualifying replacement property within the statutory time period, the taxpayer can take advantage of the involuntary conversion provisions of the tax code and defer the recognition of the realized gain.

Question 4

Wyatt sells his principal residence in December 2018 and qualifies for the § 121 exclusion. He sells another principal residence in November 2019. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Accepted Answer

While only one home can qualify for the § 121 exclusion in a given year, Wyatt can still qualify for the exclusion on the sale of his second principal residence if he meets the ownership and use tests and has not claimed the exclusion on another home within the past two years.

Question 5

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 6

Kendra owns a home in Atlanta. Her company transfers her to Chicago on January 2, 2018, and she sells the Atlanta house in early February 2018. She purchases a residence in Chicago on February 3, 2018. On December 15, 2018, Kendra's company transfers her to Los Angeles. In January 2019, she sells the Chicago residence and purchases a residence in Los Angeles. Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home.

Accepted Answer

Section 121 allows for the exclusion of gain from the sale of a principal residence if the taxpayer meets certain ownership and use tests. However, exceptions exist for unforeseen circumstances, such as a job relocation, which can allow for a partial exclusion even if multiple sales occur within a two-year period.

Question 7

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

The § 121 exclusion requires the property to have been owned and used as the taxpayer's principal residence for at least 2 out of the 5 years preceding the date of sale, not necessarily the last 2 years.

Question 8

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 from the sale, exchange, or disposition of property. Severance damages are not considered part of the amount realized as they are designated as compensation for the loss of property rather than for the sale or disposition of property.

Question 9

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 tax code, the holding period of replacement property includes the holding period of the involuntary converted property when the election to postpone gain is made. This means that if a taxpayer sells the replacement property, the holding period for determining long-term or short-term capital gains will include the holding period of the original property.

Question 10

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

Accepted Answer

The exclusion of gain under § 121 for the sale of a principal residence automatically applies; the taxpayer does not need to make an election for it to take effect.

Question 11

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

If a taxpayer's principal residence is involuntarily converted, they may be able to postpone the realized gain as a § 1033 involuntary conversion and/or exclude it as a § 121 sale of a principal residence under certain conditions.

Question 12

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 true as per the tax laws of the United States. When a business property is involuntarily converted into money, a realized gain can be postponed by reinvesting the proceeds in similar property within a specific time frame. However, a realized loss cannot be postponed and can be claimed as a deduction in the current tax year.

Question 13

Deidra has owned and occupied her principal residence for 10 years. Two and one-half years ago she married Doug who moved into her house. Doug has never owned a home. When Deidra is transferred to another city, she sells the house and has a realized gain of $425,000. Deidra can exclude the realized gain of $425,000 from her gross income under § 121 if she and Doug file a joint return.

Accepted Answer

Deidra meets the ownership and use tests for the exclusion under § 121, and because she is married to Doug and they filed a joint return, they can exclude up to $500,000 in realized gain from their gross income. The fact that Doug has never owned a home does not affect their eligibility for the exclusion.

Question 14

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

Gil's adjusted basis for the new building should be $275,000, the cost of the new building, because the postponed loss is not added to the basis. The postponed loss is deferred and not recognized immediately.

Question 15

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

Accepted Answer

This statement is true. The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

Question 16

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

Under the taxpayer-use test, the taxpayer has more flexibility in qualifying replacement property compared to the functional-use test, which requires the replacement property to be functionally similar to the converted property.

Question 17

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

Accepted Answer

For § 121 exclusion purposes, a taxpayer can have only one principal residence at a time. However, a taxpayer can switch their principal residence as many times as they want, as long as they meet the ownership and use tests for each property.

Question 18

A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.

Accepted Answer

This statement is incorrect. A taxpayer cannot recognize a loss on the sale of a principal residence because it is considered a personal use asset.

Question 19

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 20

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, 2018, 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 2,2019. 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

This statement is true. By electing § 1033, Sidney is able to postpone the gain from the destroyed building and invest the insurance proceeds in a new building without recognizing any gain. Additionally, his new basis in the building is equal to the adjusted basis of the destroyed building, which is $450,000.

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