Question 1

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

This is known as the involuntary conversion rule under Section 1033 of the Internal Revenue Code. By reinvesting the net proceeds in qualifying replacement property within the statutory time period (generally 2 years for real property and 2 or 3 years for personal property), the taxpayer can defer recognizing the realized gain on the involuntary conversion.

Question 2

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 3

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 4

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 5

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 6

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

According to IRS regulations on like-kind exchanges, the holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Question 7

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, 2017, 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, 2018. 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 is correct according to the rules of § 1033, which allows taxpayers to postpone gain recognition if they reinvest the proceeds from the involuntary conversion of property into similar property. In this scenario, Sidney reinvested all the insurance proceeds in a new building for his retail computer sales business, and therefore, he has no recognized gain and a basis in the new building of $450,000.

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 as defined by the IRS.

Question 9

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 correct, as the amount realized only includes money received from the sale or exchange of property. Any amount designated as severance damages is excluded from the amount realized.

Question 10

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 statement is true according to the IRS guidelines for involuntary conversions. A realized gain can be postponed through reinvestment in similar property, while a realized loss cannot be postponed.

Question 11

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 12

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.

Accepted Answer

If a taxpayer's principal residence is involuntarily converted due to a casualty, theft, or condemnation, the realized gain may be postponed as a § 1033 involuntary conversion or excluded as a § 121 sale of a principal residence. The taxpayer can choose which option to use or even use both if applicable.

Question 13

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

This statement is false. Taxpayers cannot recognize a loss on the sale of their principal residence, even if they acquire another qualified residence within the statutory time period. The loss is usually not deductible, but there are some exceptions such as if the property is used partially for business or rental purposes.

Question 14

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 15

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 16

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

Accepted Answer

According to IRC Section 121, a taxpayer can only have one principal residence at a time for exclusion purposes.

Question 17

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.

Question 18

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.

Accepted Answer

The answer of To qualify for the § 121 exclusion,...

Question 19

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2017. He receives insurance proceeds of $250,000 in January 2018. 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.

Accepted Answer

This is known as the involuntary conversion rule under Section 1033 of the Internal Revenue Code. If Dennis replaces the warehouse with a similar property within a certain time frame and for a cost equal to or greater than the insurance proceeds, he can defer the recognition of any realized gain.

Question 20

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

The answer of Under the taxpayer-use test for a §...

Quiz 15: Property Transactions: Nontaxable Exchanges