Question 1

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting.The exchange does not qualify as a like-kind exchange since the assets are personal.

Accepted Answer

Like-kind exchanges only apply to real property or certain types of personal property, such as equipment used in a business. Cars used for personal purposes do not qualify for like-kind exchanges.

Question 2

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in.As long as they file a joint return they can each claim a $250,000 exclusion.

Accepted Answer

This statement is true. As long as Ed and Elise file a joint return, they can each claim a $250,000 exclusion, resulting in a total exclusion of $500,000. This is allowed if both spouses meet the ownership and use requirements for the homes they sold.

Question 3

When two qualified assets are exchanged and their fair market values are not equal,additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Accepted Answer

This statement is true. The boot is typically cash or other property that is included in the exchange to balance out the difference in value between the two qualified assets. As long as the boot does not exceed a certain limit, the transaction can still qualify for nonrecognition treatment under the tax code.

Question 4

Nancy purchased her houseboat six years ago for $35,000.She has lived in the houseboat since she purchased it.A friend has offered $62,000 for the houseboat.If she sells it,she will be able to exclude the gain.

Accepted Answer

Nancy will be eligible to exclude the gain on the sale of her houseboat if she has owned and lived in the property for at least two out of the previous five years prior to the sale. In this case, Nancy has owned and lived in the houseboat for six years, meeting the eligibility requirements for excluding the gain. Therefore, the statement is true.

Question 5

Which of the following can be income deferral transactions?
I.Exchanges of like-kind property.
II.Involuntary conversions of property.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Both exchanges of like-kind property and involuntary conversions of property can qualify as income deferral transactions. In the case of like-kind property exchanges, any gain or loss is deferred as long as the property received is of like-kind and the exchange is completed within certain timeframes. In the case of involuntary conversions, such as when property is destroyed or stolen, any gain may be deferred if the proceeds are reinvested in similar property within a certain timeframe.

Question 6

For related parties to qualify for a like-kind exchange,the property received must be held for six months.

Accepted Answer

The requirement for related parties to qualify for a like-kind exchange is that the property exchanged must be held for at least two years, not six months.

Question 7

The deferral of a gain realized on an involuntary conversion is mandatory.

Accepted Answer

The deferral of a gain realized on an involuntary conversion (such as property destroyed by a natural disaster and then replaced) is not mandatory; taxpayers can choose to report the gain or to defer recognition of the gain by reinvesting the proceeds into similar property within a specified period.

Question 8

In general,qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

Accepted Answer

Qualified replacement property for an involuntary conversion generally must be purchased within a period that begins one year before and ends two years after the close of the first tax year in which any part of the gain from the conversion is realized. However, for properties compulsorily or involuntarily converted as a result of certain presidentially declared disasters, the period is extended to four years.

Question 9

A fire destroyed Jimmy's Teeshirt Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire.Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds.
I.Jimmy has a realized gain of $50,000.
II.Jimmy has a recognized gain of $50,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Jimmy has a realized gain of $50,000 because the insurance proceeds of $550,000 exceed the adjusted basis of $500,000. However, if he reinvests the insurance proceeds in a similar property (a new Teeshirt Shop), he may not have to recognize this gain for tax purposes, depending on specific tax regulations.

Question 10

An involuntary conversion occurs whenever a loss (but not a gain)is realized from a transaction that occurs against the taxpayer's will.

Accepted Answer

An involuntary conversion can occur with both a loss and a gain; it refers to the process where property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and the proceeds are reinvested in similar property, not just to situations resulting in a loss.

Question 11

The recognition of a loss realized on an involuntary conversion is mandatory.

Accepted Answer

According to the IRS rules, a loss realized on an involuntary conversion must be recognized and reported on tax returns. This is applicable in case of circumstances like theft, casualty, or condemnation, where the property is lost or destroyed and insurance or other reimbursement fails to cover the loss.

Question 12

Which of the following can be income deferral transactions?
I.Sale of municipal bonds.
II.Involuntary conversions of property.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Which of the following can be income...

Question 13

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

Accepted Answer

When a taxpayer engages in a nonrecognition transaction and defers the recognition of gain or loss, the basis of the replacement asset is adjusted accordingly to reflect the deferral. This allows the recognition of the gain or loss to be deferred until a later date when the replacement asset is sold or otherwise disposed of.

Question 14

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

Accepted Answer

This is known as the "carryover basis" rule, which applies to assets received in a like-kind exchange. The holding period of the transferred asset is added to the holding period of the newly received asset for the purpose of calculating long-term capital gains or losses.

Question 15

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh has a recognized gain of $50,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement II is correct because realized gain is the amount by which the amount realized from the sale or exchange of property exceeds the adjusted basis of the property, and in this case, the amount realized was $550,000, which exceeds the adjusted basis of $500,000, resulting in a realized gain of $100,000. However, only $50,000 is recognized gain because the amount received from the insurance company is limited by the smaller of the adjusted basis or the fair market value of the property, which in this case is $500,000. Therefore, Josh has to recognize only $50,000 of the realized gain for tax purposes.

Question 16

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory?
I.Involuntary conversion of business real estate.
II.Like-kind exchange of business real estate.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Gain deferral is fundamental to the nonrecognition...

Question 17

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

Accepted Answer

The basis of replacement property in a nonrecognition transaction is generally the adjusted basis of the property given up, increased by any gain recognized on the transaction or decreased by any money received and any loss recognized.

Question 18

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

Accepted Answer

According to the IRS, if a nonrecognition transaction is classified as a continuation of an investment, a qualified replacement asset is required.

Question 19

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

Accepted Answer

This is true according to IRS regulations. Taxpayers can structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction. These are known as "like-kind exchanges" and can provide tax benefits to taxpayers who engage in them. However, it is important to consult with a tax professional to ensure that you comply with all applicable regulations and requirements.

Question 20

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Accepted Answer

A gain on a like-kind exchange is not recognized to the extent of any boot received. Instead, the gain is deferred and rolled over into the replacement property. Any boot received is subject to immediate gain recognition.

Quiz 12: Non-Recognition Transactions

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting.The exchange does not qualify as a like-kind exchange since the assets are personal.

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in.As long as they file a joint return they can each claim a $250,000 exclusion.

When two qualified assets are exchanged and their fair market values are not equal,additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Nancy purchased her houseboat six years ago for $35,000.She has lived in the houseboat since she purchased it.A friend has offered $62,000 for the houseboat.If she sells it,she will be able to exclude the gain.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property.

For related parties to qualify for a like-kind exchange,the property received must be held for six months.

The deferral of a gain realized on an involuntary conversion is mandatory.

In general,qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

An involuntary conversion occurs whenever a loss (but not a gain)is realized from a transaction that occurs against the taxpayer's will.

The recognition of a loss realized on an involuntary conversion is mandatory.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property.

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000.

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate.

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Quiz 12: Non-Recognition Transactions

Simon exchanged his Mustang for Michael's Econovan so that he could go hunting.The exchange does not qualify as a like-kind exchange since the assets are personal.

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in.As long as they file a joint return they can each claim a $250,000 exclusion.

When two qualified assets are exchanged and their fair market values are not equal,additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Nancy purchased her houseboat six years ago for $35,000.She has lived in the houseboat since she purchased it.A friend has offered $62,000 for the houseboat.If she sells it,she will be able to exclude the gain.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property. ​

For related parties to qualify for a like-kind exchange,the property received must be held for six months.

The deferral of a gain realized on an involuntary conversion is mandatory.

In general,qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

An involuntary conversion occurs whenever a loss (but not a gain)is realized from a transaction that occurs against the taxpayer's will.

The recognition of a loss realized on an involuntary conversion is mandatory.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property. ​

The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.

The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000. ​

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate. ​

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Which of the following can be income deferral transactions? I.Exchanges of like-kind property. II.Involuntary conversions of property.

Which of the following can be income deferral transactions? I.Sale of municipal bonds. II.Involuntary conversions of property.

A fire destroyed Josh's Scuba Shop.The business had an adjusted basis of $500,000 and a fair market value of $600,000.Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000. II) Josh has a recognized gain of $50,000.

Gain deferral is fundamental to the nonrecognition transactions.In which of the following is gain deferral mandatory? I.Involuntary conversion of business real estate. II.Like-kind exchange of business real estate.