Question 1

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30,2014.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1,2015.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31,2017.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?

Accepted Answer

Sam's recognized gain is the difference between the condemnation award and the adjusted basis, which is $875,000 - $750,000 = $125,000. However, since he reinvested $845,000 in a new building, he can defer $95,000 of the gain ($875,000 - $845,000). Thus, the recognized gain is $30,000 ($125,000 - $95,000). The basis for the new building is the cost of the new building minus the deferred gain, which is $845,000 - $95,000 = $750,000.

Question 2

During 2014,Ted and Judy,a married couple,decided to sell their residence,which had a basis of $300,000.They had owned and occupied the residence for 20 years.To make it more attractive to prospective buyers,they had the outside painted in April at a cost of $6,000 and paid for the work immediately.They sold the house in May for $880,000.Broker's commissions and other selling expenses amounted to $53,000.Since they both are age 68,they decide to rent an apartment.They purchase an annuity with the net proceeds from the sale.What is the recognized gain?

Accepted Answer

Amount realized ($880,000 - $53,000)$827,000
Adjusted basis (300,000)
Realized gain $527,000
§ 121 exclusion (500,000)
Recognized gain $ 27,000
The $6,000 of painting expenses affect neither the seller's amount realized nor adjusted basis.

Question 3

During 2014,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?

Accepted Answer

Section 121 is an exclusion provision rather than a postponement provision.Thus,the adjusted basis of the new residence is the cost of $400,000.

Question 4

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:

Accepted Answer

When a taxpayer qualifies for nonrecognition of gain under § 1033, the basis of the replacement property is equal to the cost of the replacement property minus the postponed gain. This is because the postponed gain is recognized when the replacement property is sold or otherwise disposed of, and the basis is used to determine the gain or loss on that disposition. The fair market value of the involuntarily converted property minus the postponed gain is used to determine any additional gain that may need to be recognized if the cost of the replacement property exceeds the amount realized. Therefore, option C is the correct answer.

Question 5

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?

Accepted Answer

Amount realized $390,000
Adjusted basis (400,000)
Realized loss ($ 10,000)
Recognized loss ($ 10,000)
Section 1033 does not modify the normal rules for loss recognition.The basis of the replacement factory building is its cost of $450,000.

Question 6

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?

Accepted Answer

Amount realized by Tonya:
Residence (FMV)$560,000
Amount given by Tonya:
Yacht: adjusted basis $250,000
Assumption of Nancy's 200,000 (450,000)
mortgage
Realized gain $110,000
Recognized gain $110,000
This exchange does not qualify as a nontaxable exchange under § 1031.

Question 7

Ross lives in a house he received as a gift from his father.His father had lived in the house for 12 years.The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000.Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000.He incurs selling expenses of $7,000.What is Ross' recognized gain or loss and basis for the new residence?

Accepted Answer

The answer of Ross lives in a house he received...

Question 8

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:

Accepted Answer

If the taxpayer elects § 1033 treatment,the realized gain is postponed (i.e. ,temporary nonrecognition rather than permanent nonrecognition)except to the extent of the deficiency.

Question 9

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

Accepted Answer

The answer of Which of the following statements is correct...

Question 10

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30,2014.On January 11,2015,the insurance company paid the owner $450,000.The fair market value of the building was $500,000,but under the co-insurance clause,the insurance company is responsible for only 90 percent of the loss.The owner reinvested $410,000 in a new office building on February 12,2015,that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion)is elected?

Accepted Answer

The answer of An office building with an adjusted basis...

Question 11

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)?

Accepted Answer

Amount realized ($200,000 - $20,000 - $2,000)$178,000
Adjusted basis (150,000)
Realized gain $ 28,000
Recognized gain $ 28,000
Since Carl elected to forgo the § 121 exclusion,the realized gain of $28,000 is recognized.The basis of the residence purchased one month prior to the sale is the cost of $380,000.

Question 12

Jared,a fiscal year taxpayer with an August 31st year-end,owns an office building (adjusted basis of $800,000)that was destroyed by fire on December 24,2014.If the insurance settlement was $950,000 (received March 1,2015),what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

Accepted Answer

Gain of $150,000 ($950,000 amount received - $800,000 adjusted basis)is realized on March 1,2015.As Jared has two years from the close of that tax year (August 31,2015)to replace the property,the latest replacement date is August 31,2017.

Question 13

Evelyn,a calendar year taxpayer,lists her principal residence with a realtor on February 7,2014,enters into a contract to sell on July 12,2014,and sells (i.e. ,the closing date)the residence on August 1,2014.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?

Accepted Answer

The appropriate ending date in testing for the at least two-out-of-five-years ownership and occupancy requirements is the date of sale .

Question 14

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?

Accepted Answer

The realized loss of $50,000 on the sale of the Phoenix residence is disallowed.The basis for the new Atlanta residence is the purchase price of $375,000.

Question 15

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)?

Accepted Answer

Choices a. ,b. ,and d.do not satisfy the definition of an involuntary conversion.

Question 16

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?

Accepted Answer

All of the involuntary conversions satisfy the time period requirement for postponement of gain as a § 1033 involuntary conversion.The latest replacement date for each of the involuntary conversions is as follows: December 31,2016 (choice a. );December 31,2016 (choice b. );December 31,2017 (choice c. );and,June 30,2017 (choice d. ).

Question 17

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?

Accepted Answer

Amount realized:
Apartment building (FMV)$550,000
Mortgage of transferor 125,000 $675,000
(Paula)
Adjusted basis:
Apartment building Mortgage $375,000 (500,000)
of transferee (Nick)125,000
Realized gain $ 175,000
Recognized gain (net boot
received equals net boot
given)$ -0-

Question 18

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?

Accepted Answer

The severance damages are not recognized as gain or loss.

Question 19

Myrna's personal residence (adjusted basis of $100,000)was condemned,and she received a condemnation award of $80,000.Myrna used the condemnation proceeds to purchase a new residence for $90,000.What is her recognized gain or loss and her basis in the new residence?

Accepted Answer

Amount realized $ 80,000
Adjusted basis (100,000)
Realized loss ($20,000)
Recognized loss $ -0-
The loss on the condemnation of a personal residence is not recognized.The basis for Myrna's new residence is the cost of $90,000.

Question 20

During 2014,Zeke and Alice,a married couple,decided to sell their residence,which had a basis of $200,000.They had owned and occupied the residence for 20 years.To make it more attractive to prospective buyers,they had the inside painted in April at a cost of $5,000 and paid for the work immediately.They sold the house in May for $800,000.Broker's commissions and other selling expenses amounted to $50,000.They purchased a new residence in July for $400,000.What is the recognized gain and the adjusted basis of the new residence?

Accepted Answer

Amount realized ($800,000 - $50,000)$750,000
Adjusted basis (200,000)
Realized gain $550,000
§ 121 exclusion (500,000)
Recognized gain $ 50,000
The cost of repairs cannot be deducted and does not affect the adjusted basis of the new residence.Therefore,the adjusted basis of the new residence is its cost of $400,000.

Quiz 15: Property Transactions: Nontaxable Exchanges

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:

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:

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

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) ?

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?

Myrna's personal residence (adjusted basis of $100,000) was condemned,and she received a condemnation award of $80,000.Myrna used the condemnation proceeds to purchase a new residence for $90,000.What is her recognized gain or loss and her basis in the new residence?