Question 1

Charlotte's apartment building that has an adjusted basis of $200,000 is destroyed by fire.Early the following year,Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building.What is the basis in the new building?
A)$- 0 -
B)$425,000
C)$400,000
D)$200,000
E)$175,000

Accepted Answer

The basis in the new building is $200,000. This is because Charlotte reinvested the insurance proceeds in a similar property, and under the tax code, if you reinvest the proceeds from an involuntary conversion (like a fire) into similar property, you can defer recognizing the gain. Since she received $425,000 but reinvested $400,000, she is deferring the gain, and the basis of the new property becomes the adjusted basis of the old property, which is $200,000.

Question 2

Which of the following statements is/are correct?
I.The carryover-holding period only applies if the property exchanged is personal-use property.
II.The holding period of like-kind property received includes the holding period of the property exchanged.
​
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 I is incorrect, as the carryover-holding period applies to all types of property exchanged, not just personal-use property. Statement II is correct, as the holding period of the like-kind property received includes the holding period of the property exchanged.

Question 3

Carrie owns a business building with an adjusted basis of $95,000 and an appraised fair market value of $98,000.The city of Millerville condemns the property for a new highway.The condemnation award is $98,000.Carrie invests $90,000 of the proceeds into a new building on the other side of the city.What is the gain or loss that Carrie must recognize due to the transactions?
A)No gain or loss
B)$3,000 gain
C)$3,000 loss
D)$8,000 gain
E)$5,000 loss

Accepted Answer

The answer of Carrie owns a business building with an...

Question 4

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition)treatment is
A)The date of the actual condemnation.
B)The date of the threat of condemnation.
C)Two years before the actual condemnation.
D)Two years before the threat of condemnation.
E)Three years after the date of the condemnation.

Accepted Answer

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition) treatment is the date of the threat of condemnation. This allows taxpayers to act in anticipation of a condemnation, recognizing that the process and its impact on property value can begin as soon as the threat is known.

Question 5

Which of the following is/are correct regarding the sale of a principal residence?
I.A taxpayer who is single and fails to meet the ownership or use test due to change in employment is entitled to a pro rata share of the $250,000 exclusion.
II.A single taxpayer can exclude up to $250,000 of the gain on the sale of a vacation home.
​
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 I is correct because the IRS allows for a reduced exclusion on the gain of the sale of a principal residence if the sale is due to a change in employment, health, or unforeseen circumstances, and the taxpayer fails to meet the ownership or use test. Statement II is incorrect because the $250,000 exclusion applies only to the sale of a principal residence, not a vacation home.

Question 6

Which of the following is/are correct regarding involuntary conversions?
I.Gains may be deferred if the property involuntarily converted is replaced with property that is similar to or related in service or use to the converted property.
II.Deferral of gains is elective only if direct conversion is made into similar 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

Statement I is correct as according to Section 1033 of the Internal Revenue Code, gains can be deferred if the property involuntarily converted is replaced with property that is similar to or related in service or use to the converted property. However, statement II is incorrect as deferral of gains is not elective only if direct conversion is made into similar property.

Question 7

Charlotte purchases a residence for $105,000 on April 13,2004.On July 1,2014,she marries Howard and they use Charlotte's house as their principal residence.If they sell their home for $390,000,incurring $20,000 of selling expenses and purchase another residence costing $350,000.Which of the following statements is/are correct concerning the sale of their personal residence?  ​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

I) Charlotte can exclude up to $250,000 of gain on the sale of her principal residence since she meets the ownership and use test. She owned the property for more than 2 years and used it as her principal residence for more than 2 years.

II) Charlotte's new residence costs $350,000, which is less than the net sale price of $370,000 ($390,000 - $20,000 selling expenses). Therefore, she can use all of her proceeds to purchase the new residence without paying any capital gains tax.

Question 8

Which of the following qualify as replacement property under the involuntary conversion rules?
I.Smooth Yogurt Company's warehouse for storing its yogurt curds is condemned by the port authority.The warehouse will be replaced with a new office building in a neighboring community.
II.Smooth Yogurt Company's other warehouse,which was fully leased to another company,is destroyed by a tornado.The warehouse will be replaced with a rental office building adjacent to the company's new office building and will be leased to various tenants.
​
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 statement I and II qualify as replacement property under the involuntary conversion rules. The replacement property must be similar or related in service or use to the property that was converted. In statement I, the new office building will serve the same purpose as the warehouse did in storing the yogurt curds. In statement II, the rental office building will serve a similar purpose as the leased warehouse did in providing rental space for tenants.

Question 9

Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value of $185,000.The city of Springfield condemns the property for a new airport.The condemnation award is $185,000.Natural Power invests the $185,000 in a new warehouse on the other side of the city.What is the gain or loss that Natural Power Corporation must recognize due to the transactions?
A)No gain or loss
B)$10,000 gain
C)$10,000 loss
D)$185,000 gain

Accepted Answer

The condemnation award of $185,000 is less than the adjusted basis of the warehouse, resulting in a loss for Natural Power Corporation. Since the corporation reinvested the entire amount in the new warehouse, there is no gain to recognize. The loss is calculated as follows: 
Adjusted Basis - Condemnation Award = Loss 
$195,000 - $185,000 = $10,000 loss.

Question 10

Which of the following is/are correct regarding the deferral of gain attributable to the involuntary conversion of personal property (personalty)?
I.Gain deferral is mandatory.
II.Replacement property must be acquired within one year of the close of the tax year in which gain is realized from an involuntary property damage conversion.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Gain deferral for involuntary conversions is not mandatory; it is elective. Additionally, the replacement period for personal property is generally two years, not one year.

Question 11

Which of the following is/are correct concerning a principal residence?
I.The maximum amount of gain a single taxpayer can exclude on the sale of a principal residence is $500,000.
II.To qualify for a $250,000 exclusion,a single taxpayer must have owned and used the property as a principal residence for at least 2 of the previous 5 years.
​
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 maximum amount of gain a single taxpayer can exclude on the sale of a principal residence is $250,000, not $500,000. The $500,000 exclusion applies to married couples filing jointly. Statement II is correct as it accurately describes the ownership and use requirements to qualify for the exclusion.

Question 12

Which of the following qualify as replacement property under the involuntary conversion rules?
I.Mayfield Ice Cream Company's production plant is destroyed by a hurricane.The insurance proceeds are used to replace the plant with a refrigerated storage container.
II.Mayfield Ice Cream Company's production plant is destroyed by a fire.They sign a five year lease for a replacement production facility,and the insurance proceeds are then used to buy an office building
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Under the involuntary conversion rules, the replacement property must be similar or related in service or use to the property it replaces. Statement I does not qualify because a refrigerated storage container is not similar in service or use to a production plant. Statement II does not qualify because leasing a facility and using insurance proceeds to buy an office building does not meet the criteria for replacement property, as the purchased office building is not similar or related in service or use to the destroyed production plant.

Question 13

Robbie and Mike exchange machinery in a qualified like-kind exchange.Robbie's old machine,which originally cost $42,000,has an adjusted basis of $26,000.His old machine is worth $32,000.Since the machine Mike is trading is worth only $27,000 (Mike's basis is $18,000),Mike will even up the exchange by giving Robbie $5,000 in cash.
a.What is Robbie's realized gain (loss) on the machine?
b.What is Robbie's recognized gain (loss) on the machine?
c.What is the character of Robbie's gain or loss on the machine?
d.What is Robbie's basis in his new machine?

Accepted Answer

The answer of Robbie and Mike exchange machinery in a...

Question 14

Which of the following is/are correct concerning a principal residence?
I.A principal residence can be a house,condominium,mobile home,or houseboat.
II.A taxpayer can have more than one principal residence at a time.
​
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 I is correct according to the IRS definition of a principal residence. However, statement II is incorrect as a taxpayer can only have one principal residence at a time for tax purposes.

Question 15

Compare the deferral of recognition of losses resulting from an involuntary conversion with the deferrals for like-kind exchanges.

Accepted Answer

The answer of Compare the deferral of recognition of losses...

Question 16

Benito owns an office building he purchased five years ago at a cost of $600,000.The property is currently worth $800,000,has an adjusted basis of $300,000 and is encumbered by a $400,000 mortgage.
Mitch owns an apartment complex he purchased three years ago at a cost of $600,000.The property is currently worth $750,000,has an adjusted basis of $500,000 and is encumbered by a $325,000 mortgage.
Benito and Mitch would like to exchange the properties and their respective mortgages.Answer the following questions regarding the exchange.
a.Any boot is to be paid in cash. Who must pay the boot and how much must be paid?
b.Does Benito have to recognize any gain on the exchange? If so, indicate the amount of gain to be recognized and why it must be recognized.

Accepted Answer

The answer of Benito owns an office building he purchased...

Question 17

Nancy acquired office equipment for her business three years ago at a cost of $15,000.During the current year,she exchanges the equipment for different equipment with a fair market value of $9,000.MACRS depreciation on the original equipment was $9,828.The exchange qualifies as a like-kind exchange.Immediately after the exchange Nancy sells the new equipment for $9,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$3,828 Section 1231 gain.
C)$3,828 Section 1245 ordinary income.
D)$6,000 Section 1245 ordinary income
E)$9,828 section 1245 ordinary income and $6,000 Section 1231 loss.

Accepted Answer

Since the exchange qualifies as a like-kind exchange, Nancy must use the adjusted basis of the original equipment as the basis for the new equipment. The adjusted basis of the original equipment is the original cost minus the accumulated depreciation, which in this case is $15,000 - $9,828 = $5,172. Since the fair market value of the new equipment received in the exchange is $9,000, Nancy has a realized gain of $3,828 ($9,000 - $5,172). This gain is treated as Section 1245 ordinary income because the original equipment was 5-year property under MACRS. When Nancy sells the new equipment for cash, she recognizes an additional $9,000 of ordinary income, resulting in a total recognized gain of $12,828.

Question 18

Norm acquired office equipment for his business at a cost of $10,000.After two years of use,Norm exchanges the equipment for different equipment with a fair market value of $7,000.MACRS depreciation on the original equipment was $4,753 The exchange qualifies as a like-kind exchange.Immediately after the exchange Norm sells the new equipment for $7,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$1,753 Section 1231 gain.
C)$1,753 Section 1245 ordinary income.
D)$4,753 Section 1231 gain.
E)$4,753 section 1245 ordinary income, and $3,000 Section 1231 loss.

Accepted Answer

The answer of Norm acquired office equipment for his business...

Question 19

Discuss the concepts underlying the determination of the basis of property received in a nontaxable exchange.

Accepted Answer

The answer of Discuss the concepts underlying the determination of...

Question 20

Which of the following is/are correct regarding the sale of a principal residence?
I.A single taxpayer can only use the $250,000 exclusion once every 3 years.
II.Married taxpayers who both meet the ownership and use tests and file jointly can each exclude $250,000 of gain ($500,000 total)on the sale of their principal residence.
​
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. Married taxpayers who both meet the ownership and use tests and file jointly can each exclude $250,000 of gain ($500,000 total) on the sale of their principal residence. Statement I is incorrect. A single taxpayer can use the $250,000 exclusion once every 2 years.

Quiz 12: Non-Recognition Transactions

Charlotte's apartment building that has an adjusted basis of $200,000 is destroyed by fire.Early the following year,Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building.What is the basis in the new building?

Which of the following statements is/are correct? I.The carryover-holding period only applies if the property exchanged is personal-use property. II.The holding period of like-kind property received includes the holding period of the property exchanged. ​

The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition) treatment is

Which of the following is/are correct concerning a principal residence? I.A principal residence can be a house,condominium,mobile home,or houseboat. II.A taxpayer can have more than one principal residence at a time. ​

Compare the deferral of recognition of losses resulting from an involuntary conversion with the deferrals for like-kind exchanges.

Discuss the concepts underlying the determination of the basis of property received in a nontaxable exchange.

Which of the following statements is/are correct? I.The carryover-holding period only applies if the property exchanged is personal-use property. II.The holding period of like-kind property received includes the holding period of the property exchanged.

Which of the following is/are correct concerning a principal residence? I.A principal residence can be a house,condominium,mobile home,or houseboat. II.A taxpayer can have more than one principal residence at a time.