Question 1

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:

Accepted Answer

If the taxpayer qualifies for § 1033 nonrecognition and reinvests less than the amount realized, only the deficiency is recognized as gain. Therefore, realized gain is recognized to the extent of the deficiency (amount realized not reinvested).

Question 2

In determining the basis of like-kind property received, postponed losses are:

Accepted Answer

Postponed losses are added to the fair market value of the like-kind property received to determine the basis of the new property.

Question 3

Molly exchanges land (adjusted basis of $85,000? fair market value of $78,000) used in her business and common stock held for investment (adjusted basis of $10,000? fair market value of $15,000) for a single parcel of land (fair market value of $93,000) to be used in her business in a like-kind exchange. What is Molly's recognized gain or loss?

Accepted Answer

The answer of Molly exchanges land (adjusted basis of $85,000?...

Question 4

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 5

In October 2018, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2007 while Jerry purchased his in 2010. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben's realized gain is $30,000. On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin?

Accepted Answer

In a § 1031 like-kind exchange, the holding period for the property received includes the holding period of the property exchanged. Therefore, Ben's holding period for the realty received from Jerry begins in 2007. However, the holding period for the stock received begins on the date of the exchange, which is 2018.

Question 6

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss?

Accepted Answer

In a like-kind exchange, the recognized gain is the lesser of the realized gain or the boot received. Here, the realized loss is $25,000 ($200,000 - $225,000), and the boot received is $20,000. Since there is no gain to recognize and losses are not recognized in like-kind exchanges, the recognized gain or loss is $0.

Question 7

Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?

Accepted Answer

Only the condemnation of her personal residence qualifies as an involuntary conversion because it was taken by a government entity for public use. The other events were voluntary decisions made by Joyce and do not qualify as involuntary conversions.

Question 8

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?

Accepted Answer

The answer of Which of the following statements is correct...

Question 9

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

Accepted Answer

The answer of Which of the following statements is correct...

Question 10

Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonya's realized and recognized gain?

Accepted Answer

Tonya's realized gain is calculated as the fair market value of the asset received ($560,000) minus the adjusted basis of the asset given ($250,000), resulting in a $310,000 realized gain. However, the recognized gain is limited to the boot received, which is the mortgage assumed by Tonya ($200,000) minus the fair market value of the yacht ($360,000), resulting in a $110,000 recognized gain.

Question 11

Bud exchanges land with an adjusted basis of $22,000 and a fair market value of $30,000 for another parcel of land with a fair market value of $28,000 and $2,000 cash. What is Bud's recognized gain or loss?

Accepted Answer

To calculate the recognized gain or loss, we need to compare the adjusted basis of the land given up ($22,000) to the total value of what is received ($28,000 + $2,000 = $30,000).

Since the value received is greater than the adjusted basis, there is a realized gain of $8,000 ($30,000 - $22,000). However, only the cash received ($2,000) is taxable, so the recognized gain is $0 for the land exchange itself.

Therefore, the answer is B, as Bud will only recognize a gain of $2,000 for the cash received.

Question 12

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2018. If the insurance settlement was $950,000 (received March 1, 2019), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

Accepted Answer

Under § 1033, a taxpayer has two years from the end of the tax year in which the gain is realized to replace the property. Since Jared's fiscal year ends on August 31, 2019, he has until August 31, 2021, to replace the office building.

Question 13

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of gain should Paula recognize?

Accepted Answer

Paula exchanged properties of like-kind and the mortgages were equal, so no gain is recognized under the like-kind exchange rules.

Question 14

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land?

Accepted Answer

When exchanging property, the gain or loss is not recognized if it is a like-kind exchange. In this case, since Pam exchanged a rental building for investment land, which are both considered real property, the exchange qualifies as a like-kind exchange. Therefore, no gain or loss is recognized.

The basis of the investment land is determined by taking the adjusted basis of the relinquished property (rental building) and adding any cash received in the exchange.

Basis of Investment Land = Adjusted Basis of Rental Building + Cash Received
Basis of Investment Land = $520,000 + $100,000
Basis of Investment Land = $620,000

Therefore, the recognized gain or loss is $0 and the basis of the investment land is $620,000.

Question 15

Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds?

Accepted Answer

The answer of Melvin receives stock as a gift from...

Question 16

Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena's mortgage on the land. What is the amount of Dena's recognized gain or loss on the exchange?

Accepted Answer

The answer of Dena owns 500 acres of farm land...

Question 17

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

Accepted Answer

The answer of If boot is received in a §...

Question 18

Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000). Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium. Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000 in severance damages. Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 +$300,000) proceeds are invested in the stock market. What is her recognized gain or loss associated with the receipt of the severance damages?

Accepted Answer

The severance damages are not taxable because they are not considered to be income.

Question 19

Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building?

Accepted Answer

The recognized gain is $0 because it is a like-kind exchange, and the basis of the office building is $450,000 (adjusted basis of the warehouse $600,000 - cash received $150,000).

Question 20

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2018. On January 11,2019, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2019, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

Accepted Answer

The recognized gain is $40,000, which is the insurance proceeds ($450,000) minus the reinvested amount ($410,000). The basis of the new building is the adjusted basis of the old building ($320,000) because the gain is deferred under § 1033.

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

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) , makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is: