Question 1

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2018, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027. If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 (assuming straight-line amortization is appropriate)?
A) $300 and $11,000
B) $300 and $10,900
C) $200 and $11,000
D) $200 and $10,900
E) None of the above

Accepted Answer

To amortize the bond premium, we need to calculate the annual amortization amount first:

Premium amortization per year = (purchase price - face value) / years to maturity
= ($11,000 - $10,000) / 10
= $100

So, Jason's amortization of bond premium for 2018 will be $100 ($10,000 * 3% = $300 - $100 = $200 taxable interest income).

Adjusted basis at the end of 2018 = purchase price - total amortization
= $11,000 - $100
= $10,900

Therefore, the correct choice is D.

Question 2

Capital recoveries include:
A) The cost of capital improvements.
B) Ordinary repair and maintenance expenditures.
C) Payments made on the principal of a mortgage on taxpayer's building.
D) Amortization of bond premium.
E) All of the above.

Accepted Answer

The answer of Capital recoveries include:
A) The cost of capital...

Question 3

Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?
A) $0
B) $7,000
C) $7,800
D) $10,200
E) None of the above

Accepted Answer

The answer of Sandra's automobile, which is used exclusively in...

Question 4

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2018, for $11,000. The maturity date is December 31, 2027. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2018, and the adjusted basis for the bonds at the end of 2018, assuming straight-line amortization is appropriate?
A) $0 and $11,000
B) $0 and $10,900
C) $100 and $11,000
D) $100 and $10,900
E) None of the above

Accepted Answer

The answer of Karen owns City of Richmond bonds with...

Question 5

Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.

Accepted Answer

Kelly meets the requirements for exclusion of up to $250,000 of gain on the sale of her principal residence since she owned and occupied it for at least 2 out of the 5 years prior to the sale. Since her recognized gain on the sale is $39,000, which is less than the maximum exclusion of $250,000, she will not owe any capital gains tax on the sale. Her basis for the new principal residence will be its purchase price of $200,000.

Question 6

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?
A) $0
B) $12,000
C) ($13,000)
D) ($25,000)
E) None of the above

Accepted Answer

The answer of Katie sells her personal use automobile for...

Question 7

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?
A) $0
B) $38,000
C) $70,000
D) $110,000
E) None of the above

Accepted Answer

The recognized gain is calculated as the selling price minus the adjusted basis and selling expenses. The adjusted basis is the original cost plus improvements: $450,000 + $40,000 = $490,000. The selling expenses are $28,000 + $4,000 = $32,000. The recognized gain is $560,000 - $490,000 - $32,000 = $38,000.

Question 8

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions.

Accepted Answer

The taxpayer can use both provisions as long as they meet the qualifications for each provision. They can exclude up to $250,000 ($500,000 for married filing jointly) of gain from the sale of their principal residence under § 121, and can postpone any remaining gain by using § 1033 due to the involuntary conversion of their property.

Question 9

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?
A) $0
B) $45,000
C) $163,000
D) $208,000
E) None of the above

Accepted Answer

The answer of Pedro borrowed $250,000 to purchase a machine...

Question 10

Janice bought her house in 2009 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2018. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Don buys the house for $500,000 in cash and assumes her mortgage of $194,000. What is Janice's adjusted basis at the date of the sale and the amount realized?
A) $370,000 adjusted basis? $661,400 amount realized.
B) $370,000 adjusted basis? $659,000 amount realized.
C) $370,000 adjusted basis? $665,200 amount realized.
D) $325,000 adjusted basis? $663,200 amount realized.
E) $325,000 adjusted basis? $694,000 amount realized.

Accepted Answer

Janice's adjusted basis at the time of sale would be:
Original purchase price: $395,000
Additions:
- Improvements (pipes and plumbing): $45,000
- Advertising and realtor fees: $34,700 + $300 = $35,000
Subtractions:
- Depreciation: $70,000

Adjusted basis = $395,000 + $45,000 + $35,000 - $70,000 = $405,000 - $70,000 = $335,000

The amount realized from the sale would be:
Sale price: $500,000
Less: assumed mortgage: $194,000
Less: adjusted basis: $335,000

Amount realized = $500,000 - $194,000 - $335,000 = $(29,000)

However, since the amount realized is negative, it means that Janice has a loss on the sale. This loss is deductible on her tax return. Therefore, the final amount realized for tax purposes would be $0 (the loss would offset any gain she may have had on other investments during the year).

Therefore, the adjusted basis is $370,000 and the amount realized is $659,000.

Question 11

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.

Accepted Answer

Exchanging personal-use property for business-use property does not qualify for nontaxable exchange treatment. The fair market value of the personal property is considered as boot and is subject to taxation.

Question 12

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. On April 1, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?
A) $1,250,000
B) $1,370,000
C) $1,720,000
D) $1,820,000
E) None of the above

Accepted Answer

The amount realized is the sum of all the consideration received in the transaction. In this case, it would be:

Cash received: $650,000 
Note received: $600,000 
Property received: $120,000

Total amount realized = $650,000 + $600,000 + $120,000 = $1,370,000.

Question 13

Albert purchased a tract of land for $140,000 in 2015 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2018 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2018?
A) $40,000
B) $60,000
C) $80,000
D) $100,000
E) None of the above

Accepted Answer

The answer of Albert purchased a tract of land for...

Question 14

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?
A) $1,350,000
B) $1,378,000
C) $1,385,000
D) $1,413,000
E) None of the above

Accepted Answer

The answer of Carlton purchases land for $550,000. He incurs...

Question 15

Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?
A) $277,000
B) $282,000
C) $287,000
D) $300,000
E) None of the above

Accepted Answer

The amount realized is calculated as follows:
Sales Price = $300,000
Plus: Buyer paid property taxes = $5,000
Minus: Commissions = $15,000
Minus: Legal fees = $3,000
Amount Realized = $300,000 + $5,000 - $15,000 - $3,000 = $287,000. Therefore, the best choice is C.

Question 16

The bank forecloses on Lisa's apartment complex. The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the property is $480,000, and the fair market value is $750,000. What is Lisa's recognized gain or loss?
A) $270,000
B) ($750,000)
C) $0
D) ($480,000)
E) None of the above

Accepted Answer

Lisa's recognized gain is calculated as the difference between the amount realized (the debt forgiven, which is $750,000) and the adjusted basis of the property ($480,000). Therefore, the recognized gain is $750,000 - $480,000 = $270,000.

Question 17

Joyce's office building was destroyed in a fire (adjusted basis of $350,000? fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?
A) $0
B) $10,000 loss
C) $10,000 gain
D) $40,000 gain
E) None of the above

Accepted Answer

The amount of insurance proceeds received by Joyce is less than the fair market value of the destroyed building, so she has a loss. However, because of the co-insurance clause in the insurance policy, she is only able to collect $360,000 of the $400,000 fair market value of the building. Therefore, she has a gain of $40,000 ($400,000 - $360,000).

Joyce used $310,000 of the insurance proceeds to purchase additional inventory, which is a like-kind exchange under Section 1033 of the Internal Revenue Code. This means that she can defer recognizing the gain on the insurance proceeds until she sells the inventory.

The remaining $50,000 that Joyce invested in short-term certificates of deposit is not a like-kind exchange, so it is taxable. The adjusted basis of the destroyed building was $350,000, so the taxable portion of the $50,000 investment is $10,000 ($50,000 - $40,000 basis in the destroyed building).

Therefore, Joyce has a recognized gain of $10,000.

Question 18

Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.

Accepted Answer

Matt meets the qualifications for the exclusion of up to $250,000 ($500,000 for married filing jointly) of gain on the sale of a principal residence. Since he owned and occupied the residence for at least 2 out of the 5 years preceding the sale, and the gain is less than the maximum exclusion amount, he will not owe any taxes on the sale. His recognized gain is calculated as follows: Sale price $435,000 - Selling expenses $20,000 - Adjusted basis $140,000 = $275,000. However, since this gain is less than the maximum exclusion amount, none of it is taxable. He can use the entire sale price to purchase his new residence, and his basis in the new residence will be $385,000.

Question 19

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,040 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing. Karin's adjusted basis for the real estate is:
A) $374,580.
B) $375,000.
C) $375,420.
D) $379,620.
E) None of the above.

Accepted Answer

Karin's adjusted basis for the real estate is the purchase price of $375,000. The property tax adjustment does not affect the basis of the property.

Question 20

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?
A) Joy must include the $7,500 in gross income.
B) Joy must reduce the basis of the land by $7,500.
C) Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

When a portion of the land is condemned, the basis of that portion is subtracted from the basis of the entire property, and any payment received is used to reduce the basis of the property. Therefore, Joy must reduce the basis of the land by $7,500. There is no need to include the payment in gross income as it is a return of capital rather than income.

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

Capital recoveries include:

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions.

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. On April 1, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,040 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing. Karin's adjusted basis for the real estate is:

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?