Deck 15: Property Transactions: Nontaxable Exchanges

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is permanent.

Question 10

The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.

Question 11

In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized gain, but receives a new basis if there is a realized loss.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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

Question 18

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.

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

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.

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

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).

Question 27

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).

Question 28

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.

Question 29

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

Question 30

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 31

Section 1033 nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

Question 32

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.

Question 33

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

Question 34

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.

Question 35

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Question 36

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

Question 37

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).

Question 38

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.

Question 39

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.

Question 40

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).

Question 41

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 nonrecognition of gain from an involuntary conversion) involuntary conversion?

A) Al's business warehouse is destroyed by a tornado on October 31, 2018. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2018. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2020.
B) Heather's personal residence is destroyed by fire on October 31, 2018. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2018. She purchases another principal residence with the proceeds on October 31, 2020.
C) Mack's office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2018. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2021.
D) Lizzy's business automobile is destroyed in an accident on October 31, 2018. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2018. She purchases another business automobile with the proceeds on June 1, 2021.
E) All of the above.

Question 42

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?

A) December 31, 2018.
B) August 31, 2019.
C) December 31, 2020.
D) August 31, 2021.
E) None of the above.

Question 43

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

A) Added to the basis of the old property.
B) Subtracted from the basis of the old property.
C) Added to the fair market value of the like-kind property received.
D) Subtracted from the fair market value of the like-kind property received.
E) None of the above.

Question 44

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?

A) Partnership interest for a partnership interest.
B) Inventory for inventory.
C) Securities for personalty.
D) Business realty for investment realty.
E) None of the above.

Question 45

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?

A) $0
B) $400,000
C) $500,000
D) $820,000
E) None of the above

Question 46

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?

A) $0
B) $100,000
C) $300,000
D) $340,000
E) None of the above

Question 47

A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?

A) $0 and $450,000.
B) $0 and $460,000.
C) $10,000) and $440,000.
D) $10,000) and $450,000.
E) None of the above.

Question 48

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?

A) $0
B) $25,000
C) $125,000
D) $175,000
E) None of the above

Question 49

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

A) Lily's recognized gain is $50,000 and her basis for the building received is $120,000.
B) Lily's recognized gain is $50,000 and her basis for the building received is $170,000.
C) Lily's recognized gain is $0 and her basis for the building received is $120,000.
D) Lily's recognized gain is $0 and her basis for the building received is $170,000.
E) None of the above is correct.

Question 50

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

A) An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.
B) The postponement of realized gain in a § 1033 involuntary conversion is elective.
C) The functional use test is satisfied if a business warehouse is replaced with another business warehouse.
D) The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.
E) All of the above are correct.

Question 51

Which of the following statements is correct?

A) In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
B) In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
C) In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes.
D) All of the above.
E) None of the above.

Question 52

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.

Question 53

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.

Question 54

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?

A) $310,000 realized and $310,000 recognized gain.
B) $310,000 realized and $0 recognized gain.
C) $110,000 realized and $110,000 recognized gain.
D) $110,000 realized and $0 recognized gain.
E) None of the above.

Question 55

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:

A) Recognized to the extent of the deficiency amount realized not reinvested).
B) Recognized to the extent of realized gain.
C) Recognized to the extent of the amount reinvested in excess of the adjusted basis.
D) Permanently not subject to taxation.
E) None of the above.

Question 56

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)?

A) Her farm tractor is hauled to the city dump because it is worn out.
B) She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement.
C) Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000.
D) She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.
E) None of the above.

Question 57

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.

Question 58

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.

Question 59

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2018. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2019. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2021. What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

A) $0; $720,000.
B) $30,000; $750,000.
C) $30,000; $845,000.
D) $150,000; $750,000.
E) None of the above.

Question 60

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?

A) 2007, 2018.
B) 2007, 2007.
C) 2010, 2010.
D) 2010, 2018.
E) None of the above.

Question 61

Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?

A) $0 and $375,000.
B) $0 and $425,000.
C) $50,000) and $325,000.
D) $50,000) and $375,000.
E) None of the above.

Question 62

Edith's manufacturing plant is destroyed by fire on the afternoon of November 3, 2018. The adjusted basis is
$800,000. The insurance company offers a settlement of $700,000. After protracted negotiations, Edith receives
$825,000 on June 9, 2019. Edith is a fiscal year taxpayer whose tax year ends on June 30th. What is the latest date that Edith can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

Question 63

What requirements must be satisfied to receive nontaxable exchange treatment under § 1031?

Question 64

Discuss the relationship between the postponement of realized gain under § 1031 like-kind exchanges) and the adjusted basis and holding period for the replacement property.

Question 65

What effect do the assumption of liabilities have on a § 1031 like-kind exchange?

Question 66

Byron, who lived in New Hampshire, acquired a personal residence ten years ago when he was 52 years old. During this period he has occupied the residence for only eight months out of 12) each year due to winter vacations in Florida. Is Byron eligible for exclusion of gain under § 121?

Question 67

To be eligible to elect postponement of gain treatment for an involuntary conversion, what are the three tests for qualifying replacement property?

Question 68

How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?

Question 69

Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.

Question 70

What requirements must be satisfied for a delayed swap to qualify for § 1031 like-kind exchange treatment?

Question 71

Evelyn, a calendar year taxpayer, lists her principal residence with a realtor on February 7, 2018, enters into a contract to sell on July 12, 2018, and sells i.e., the closing date) the residence on August 1, 2018. The realized gain on the sale is $225,000. Which date is the appropriate ending date in determining if the residence has been owned and used by the Evelyn as the principal residence for at least two years during the prior five-year period?

A) February 7, 2018.
B) July 12, 2018.
C) August 1, 2018.
D) December 31, 2018.
E) None of the above.

Question 72

Melissa, age 58, marries Arnold, age 50, on June 1, 2018. Melissa decides to sell her principal residence on August 1, 2018, which she has owned and occupied for the past 30 years. Arnold has never owned a house. However, while he was married to Kelly who died 6 months prior to his marriage to Melissa, Kelly used the § 121 election on the sale of her residence in January 2016 to reduce her realized gain from $123,000 to $0. Kelly used the sales proceeds to pay off Arnold's gambling debts. Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?

Question 73

Carl sells his principal residence, which has an adjusted basis of $150,000 for $200,000. He incurs selling expenses of $20,000 and legal fees of $2,000. He had purchased another residence one month prior to the sale for $380,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion exclusion of gain on sale of principal residence)?

A) $0 and $380,000.
B) $0 and $408,000.
C) $28,000 and $352,000.
D) $28,000 and $380,000.
E) None of the above.

Question 74

Evelyn's office building is destroyed by fire on July 12, 2018. The adjusted basis is $315,000. She receives insurance proceeds of $350,000 on August 31, 2018. Calculate the amount that Evelyn must reinvest in qualifying property in order that her recognized gain be $20,000. Assume she elects § 1033 nonrecognition of gain from an involuntary conversion) postponement treatment.

Question 75

Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.

Question 76

Edward, age 52, leased a house for one year in Memphis with an option to buy as his personal residence. At the end of the lease, he purchased the house. He lived there for an additional 26 months before his employer transferred him to Tucson. Expecting to be in Tucson for 18 to 24 months, he rented the Memphis house for 18 months with an option to extend on a month to month basis for an additional 6 months. At the end of the 18-month period, Edward's employer offered him a permanent position in Tucson as branch manager. The tenant who had been occupying Edward's house in Memphis purchased it at the end of the 24-month extended lease period. Is Edward eligible to elect exclusion treatment under § 121?

Question 77

What kinds of property do not qualify under the like-kind provisions?

Question 78

If the taxpayer qualifies under § 1033 nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is:

A) The cost of the replacement property.
B) The fair market value of the involuntarily converted property minus the postponed gain.
C) The cost of the replacement property minus the postponed gain.
D) The amount realized.
E) None of the above.

Question 79

Discuss the treatment of realized gains from involuntary conversions.

Question 80

During 2018, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000. They purchased a new residence in June for
$400,000. What is the adjusted basis of the new residence?

A) $0
B) $141,000
C) $162,000
D) $191,000
E) None of the above