Question 1

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, 2016, 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, 2017. 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 scenario meets the requirements for a like-kind exchange under § 1033, as the insurance proceeds were reinvested in a similar property used in a similar business within the required time frame. Therefore, Sidney has no recognized gain and a basis in the new building of $450,000, which is the adjusted basis of the original building.

Question 2

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 definition of an involuntary conversion according to the Internal Revenue Service (IRS).

Question 3

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 4

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

This is correct according to the rules stated in Section 1033 of the Internal Revenue Code. When a taxpayer makes the election to postpone gain on an involuntary conversion, the holding period of the replacement property includes the holding period of the converted property. This means that if the taxpayer holds the replacement property for at least one year, they may qualify for long-term capital gains treatment when they sell the property.

Question 5

Terry exchanges real estate (acquired on August 25, 2010) held for investment for other real estate to be held for investment on September 1, 2016. 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, 2010.

Accepted Answer

This is correct according to the rules of Section 1031 of the Internal Revenue Code, which allows for the exchange of like-kind property held for investment or productive use in a trade or business. By deferring the gain recognition and carrying over the basis, Terry's holding period for the new real estate begins on the same date as the original property.

Question 6

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 7

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 8

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 9

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

If the fair market value of the boot surrendered in a like-kind exchange is less than its adjusted basis, the taxpayer may have to recognize a loss.

Question 10

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 11

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

The answer of Gil's office building (basis of $225,000 and...

Question 12

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

According to IRS rules, if the net proceeds received in an involuntary conversion are reinvested in qualifying replacement property within the statutory time period, the taxpayer can defer the recognition of the realized gain. This is known as a like-kind exchange, and it is a way for taxpayers to avoid paying taxes on the gain from the converted property as long as they reinvest in similar property.

Question 13

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

Shari's recognized gain is $300,000, which is the lesser of the gain realized ($300,000, calculated as the fair market value of the apartment building plus cash received [$900,000 + $100,000] minus the adjusted basis of the office building [$700,000]) or the boot received ($100,000). However, the correct calculation for the basis of the new property is the fair market value of the apartment building ($900,000) minus the gain not recognized ($200,000, which is the gain realized minus the boot received) or plus the loss if realized, which results in a basis of $700,000 for the apartment building, not $800,000.

Question 14

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 amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer under IRC Section 1231.

Question 15

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 recognized gain in a like-kind exchange is calculated by subtracting the adjusted basis of the property given up from the fair market value of the property received. In this case, the recognized gain would be $4,000 ($19,000 - $15,000). Additionally, the adjusted basis for the property received would be $19,000, not $21,000.

Question 16

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 17

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 replacement property must be "similar or related in service or use" to the converted property, while under the functional-use test, the replacement property must only be used in a "similar or related in service or use" manner. This gives the taxpayer more flexibility in choosing the replacement property that meets the functional-use test.

Question 18

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 19

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2016. He receives insurance proceeds of $250,000 in January 2017. If before 2020, 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 known as the involuntary conversion rule, which allows taxpayers to defer recognition of any realized gain if they replace the destroyed property within a certain time frame and meet other requirements. In this case, as long as Dennis replaces the warehouse before 2020 with a property costing at least $250,000, he can defer recognition of any gain from the insurance proceeds he received in 2017.

Question 20

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.

Quiz 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges