Question 1

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

Accepted Answer

In a § 1031 like-kind exchange, if boot (cash or other dissimilar property) is received, the recognized gain cannot exceed the realized gain. This means that if the realized gain is $10,000 and boot of $3,000 is received, the recognized gain cannot exceed $3,000. Any remaining gain is deferred and carried forward to the replacement property.

Question 2

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 statement is true. The taxpayer can defer the recognition of the gain by reinvesting the net proceeds in qualifying replacement property within the statutory time period. This is known as a like-kind exchange under Section 1033 of the Internal Revenue Code.

Question 3

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 only includes the actual amount received by the taxpayer, not any amount designated as severance damages.

Question 4

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, a loss may be recognized by the taxpayer. This loss may be used to offset gains from other transactions or deducted against ordinary income up to a certain limit. However, no loss can be recognized if the boot surrendered has a fair market value that is greater than its adjusted basis.

Question 5

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, 2019, 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 2,2020. 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

Sidney can elect under § 1033 to defer recognition of the gain from the involuntary conversion of his business property by reinvesting the insurance proceeds into similar property. His basis in the new property is correctly calculated as the cost of the new property minus the deferred gain.

Question 6

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 is considered to have begun on the same date as the holding period for the relinquished property). However, the holding period for the boot received begins on the date of the exchange.

Question 7

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

Bria's adjusted basis for the new building would be $225,000, not $307,500. The basis of the new property is the cost of the new property ($275,000) minus the gain that was not recognized (postponed) because the insurance proceeds were reinvested in similar property. Since the insurance proceeds were $192,500 and the original basis of the destroyed property was $225,000, the unrecognized gain is $0 because there was no gain; the proceeds did not exceed the original basis. Therefore, the basis of the new property is its cost, $275,000, without any adjustment for postponed gain.

Question 8

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 other property received, and it does not directly take the fair market value as its basis. The realized gain may affect the overall basis calculation, but the statement as phrased is incorrect.

Question 9

If a taxpayer exchanges like-kind property 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 and...

Question 10

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

If the exchange qualifies as a like-kind exchange, there is no recognized gain. Cole's adjusted basis for the property received would be $15,000 (the adjusted basis of the property exchanged). The cash received is not relevant to determining recognized gain or adjusted basis.

Question 11

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

In a like-kind exchange, the recognized gain is the lesser of the boot received or the realized gain, not the greater.

Question 12

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

Accepted Answer

The answer of Casualty losses and condemnation losses on the...

Question 13

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 14

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.

Accepted Answer

Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of like-kind property used in a trade or business or held for investment. However, it does not apply to exchanges of personal property (personalty) after the Tax Cuts and Jobs Act of 2017; it now only applies to real property.

Question 15

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

Accepted Answer

Section 1033 primarily deals with the nonrecognition of gain for tax purposes when property is involuntarily converted into similar property. It does not apply to losses, which are generally treated differently under tax law.

Question 16

Pat owns a 1965 Ford Mustang that 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.

Accepted Answer

Pat's recognized gain is $5,000 (the difference between the Mustang's current value of $27,000 and its purchase price of $22,000). His adjusted basis for the convertible would be $27,000, the value of the Triumph Spitfire convertible he received in the exchange.

Question 17

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 as defined by the Internal Revenue Service (IRS).

Question 18

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 correct according to the rules of Section 1033 of the Internal Revenue Code, which allows a taxpayer to defer the recognition of gain on the involuntary conversion of property (such as by a natural disaster) if the taxpayer replaces the property within a certain time period and for an equal or greater cost. In this case, Dennis has received insurance proceeds that exceed the adjusted basis of the destroyed warehouse, resulting in potential gain. By using the proceeds to replace the warehouse within the specified time period, he can defer the recognition of any gain.

Question 19

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

If a taxpayer elects to postpone gain under § 1033 by replacing involuntarily converted property, the holding period of the replacement property includes the holding period of the converted property. This is known as a "tacking" rule, and it applies for the purpose of determining whether the replacement property meets the requisite holding period for long-term capital gains treatment.

Question 20

Terry exchanges real estate (acquired on August 25, 2013) held for investment for other real estate to be held for investment on September 1, 2019. 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, 2013.

Accepted Answer

This is in accordance with the rules for like-kind exchanges under section 1031 of the Internal Revenue Code. Terry's holding period for the new real estate begins on the date he acquired the original real estate.

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