Question 1

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 2

Wyatt sells his principal residence in December 2019 and qualifies for the § 121 exclusion.He sells another principal residence in November 2020.Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Accepted Answer

Although Wyatt cannot claim the § 121 exclusion on the sale of the second residence in 2020 if he has already claimed it on a previous home sale in the past two years, he may still be able to claim other tax benefits, such as the § 1031 exchange or deducting his real estate commissions and closing costs from the sale of the second residence.

Question 3

If an election to postpone gain under § 1033 is made, the holding period of replacement property includes the holding period of the involuntarily converted property.

Accepted Answer

This is true per § 1.1033(g)-1(b)(2) of the IRS regulations.

Question 4

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

According to § 121 of the Internal Revenue Code, a taxpayer may exclude up to $250,000 of realized gain from the sale of their principal residence if they owned and occupied the home for at least 2 out of the 5 years preceding the sale. However, if the taxpayer is married and filing jointly, they may exclude up to $500,000 of realized gain if both spouses meet the ownership and use requirements. In this case, Deidra owned and occupied the home for 10 years, and Doug has never owned a home, so they both meet the ownership and use requirements. Therefore, they can exclude the realized gain of $425,000 from their gross income if they file a joint return.

Question 5

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

A taxpayer cannot recognize a loss on the sale of their principal residence under current tax law.

Question 6

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 7

Kelly, who is single, sells her principal residence, which she has owned and occupied for eight 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

The recognized gain is calculated as follows: 
Sale Price - Adjusted Basis - Selling Expenses = Recognized Gain
$375,000 - $64,000 - $22,000 = $289,000 - $250,000 (exclusion for single taxpayers) = $39,000 recognized gain.
Since she purchased another principal residence within two years for at least the same amount as the sale price, she can exclude up to $250,000 of the recognized gain. Therefore, her basis for the new principal residence is the purchase price of $200,000.

Question 8

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 9

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

Accepted Answer

Casualty losses may be deductible if they meet certain criteria, while condemnation losses on a personal residence are generally not deductible.

Question 10

Bria'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, Bria receives insurance proceeds of $192,500 two months after the date of the loss.One month later, Bria uses the insurance proceeds to purchase a new office building for $275,000.Her adjusted basis for the
new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Accepted Answer

The adjusted basis for the new building would be $275,000 (the purchase price), not $307,500. The postponed loss of $32,500 would be added to the adjusted basis of any future property Bria may purchase.

Question 11

Kendra owns a home in Atlanta.Her company transfers her to Chicago on January 2, 2019, and she sells the
Atlanta house in early February 2019.She purchases a residence in Chicago on February 3, 2019.On December 15,
2019, Kendra's company transfers her to Los Angeles.In January 2020, 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 of the Internal Revenue Code allows for the exclusion of gain from the sale of a principal residence if the homeowner has owned and used the home as their principal residence for at least two of the five years prior to the sale. The fact that multiple sales have occurred within a two-year period does not automatically disqualify a homeowner from § 121 treatment; each sale must be evaluated individually to determine if the ownership and use tests are met, and there are also special rules that may apply in the case of job-related moves.

Question 12

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 13

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, as severance damages are not included in the amount realized for tax purposes.

Question 14

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 15

Matt, who is single, sells his principal residence, which he has owned and occupied for five 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 qualifies for the full $250,000/$500,000 exclusion for the sale of his principal residence since he owned and occupied it for at least two years. Therefore, his recognized gain is calculated as follows: $435,000 (sales price) - $140,000 (adjusted basis) - $20,000 (selling expenses) = $275,000. However, since this gain falls within the exclusion limit, it is not taxable. His basis for the new residence is the purchase price of $385,000, which is not affected by the sale of his previous residence.

Question 16

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) that is destroyed by a tornado in October 2019.He receives insurance proceeds of $250,000 in January 2020.If before 2022, 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 under Section 1033 of the tax code. If Dennis replaces the warehouse within a certain time frame and meets certain requirements, he can defer the recognition of any gain realized from the destruction of the original warehouse.

Question 17

If a taxpayer reinvests the net proceeds (amount received minus 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 is known as the "like-kind exchange" or "1031 exchange" rule in the tax code. By reinvesting the net proceeds in qualifying replacement property within 45 days after the date of the conversion, and then acquiring the replacement property within 180 days after the date of the conversion, the taxpayer can defer recognition of the realized gain.

Question 18

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the five years preceding the date of sale and owned by the taxpayer as the principal residence for the last two of those years.

Accepted Answer

To qualify for the § 121 exclusion, the property must have been owned and used as the taxpayer's principal residence for at least two of the five years preceding the date of sale, not all five years.

Question 19

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

Accepted Answer

According to IRS publication 523, a taxpayer can only treat one property as their principal residence at a time for the purpose of claiming the § 121 exclusion. In order for a taxpayer to qualify for the exclusion, the property must have been their main home for at least two out of the past five years.

Question 20

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.

Quiz 15: Property Transactions: Nontaxable Exchanges