chapter i12

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Prentice Hall's Federal Taxation 2015 Comprehensive, 28e(Pope)

Chapter I12 Property Transactions: Nontaxable Exchanges

1) Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition

treatment.

Answer: TRUEExplanation: Unless a provision in the tax law provides an exclusion of gain, a disallowance of loss or a

deferral of either, a realized gain or loss will be recognized.

Page Ref.: I:12-2

Objective: 1

2) In a like-kind exchange, both the property transferred and the property received must be held by the

taxpayer either for productive use in a trade or business or for investment.

Answer: TRUE

Explanation: Personal use property does not qualify as like-kind property.

Page Ref.: I:12-2

Objective: 1

3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an

investment qualifies for like-kind treatment.

Answer: FALSE

Explanation: The two assets are not of "like-kind," and personal-use assets and marketable securities do

not qualify.

Page Ref.: I:12-2; Example I:12-2

Objective: 1

4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

Answer: FALSE

Explanation: Like-kind treatment is mandatory if the transaction meets the terms of Section 1031.Page Ref.: I:12-2

Objective: 1

5) Real property exchanged for personal property qualifies as a like-kind exchange.

Answer: FALSE

Explanation: An exchange is not like-kind if one class of property is exchanged for another class.

Page Ref.: I:12-3

Objective: 1

6) An investor exchanges an office building located in Niagara Falls, NY for an office building located in

Niagara Falls, Ontario. The exchange does not qualify as like-kind.

Answer: TRUE

Explanation: Transfers of real property in the U.S. for real property outside the U.S. are not like-kind.

Page Ref.: I:12-3

Objective: 1

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7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

Answer: FALSE

Explanation: An exchange of inventory or securities does not qualify as a like-kind exchange.

Page Ref.: I:12-4

Objective: 1

8) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind

exchange.

Answer: FALSE

Explanation: Partnership interests, along with inventory and marketable securities, are disqualified

assets.

Page Ref.: I:12-4

Objective: 1

9) A sale of property and subsequent purchase of like-kind property may be treated as a like-kind

exchange if the two transactions are interdependent.

Answer: TRUE

Explanation: The tax law does allow for a three party exchange if structured properly.Page Ref.: I:12-5

Objective: 1

10) For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.

Answer: TRUE

Explanation: The addition of cash or non-like-kind property is needed when the qualifying like-kind

properties being exchanged are not of equal value. Any cash or other property which is not like-kind is

treated as boot.

Page Ref.: I:12-6

Objective: 1

11) The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.

Answer: FALSE

Explanation: Receipt of boot will only cause recognition if gain is realized on the underlying exchange.

Page Ref.: I:12-6

Objective: 1

12) Where non-like-kind property other than cash is received as boot, the amount of the boot is the

property's fair market value.

Answer: TRUE

Explanation: Non-cash boot is always received at fair market value.

Page Ref.: I:12-6

Objective: 1

13) If each party in a like-kind exchange assumes a liability of the other party, only the net liability given

or received is boot.

Answer: TRUE

Explanation: The exchange of liabilities is netted to determine which party is deemed to have received

boot and which party is deemed to have paid boot.

Page Ref.: I:12-7

Objective: 1

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14) The basis of non-like-kind property received is the basis in the hands of the transferor at the date of

the exchange.

Answer: FALSE

Explanation: Boot is received at fair market value.

Page Ref.: I:12-8

Objective: 1

15) If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be

retained for three years after the exchange to prevent recognition of gain resulting from the original

exchange on a subsequent disposition of the property.

Answer: FALSE

Explanation: The property must be retained for two years.

Page Ref.: I:12-8

Objective: 1

16) The holding period of like-kind property received in a nontaxable exchange begins on the day of the

exchange.Answer: FALSE

Explanation: The holding period includes the holding period of the like-kind property if that property is

a capital asset or 1231 property.

Page Ref.: I:12-9

Objective: 1

17) The holding period for boot property received begins on the day after the date of the exchange.

Answer: TRUE

Explanation: While the like-kind property may have a carryover holding period, boot received starts a

new holding period.

Page Ref.: I:12-10

Objective: 1

18) The involuntary conversion provisions which allow deferral of gain are mandatory.

Answer: FALSE

Explanation: If a gain is realized on an involuntary conversion, deferral is elective.

Page Ref.: I:12-10 Key Point

Objective: 2

19) If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying

replacement property is acquired within a specified time period at a cost equal to or greater than the

amount realized on the involuntary conversion.

Answer: TRUEExplanation: The ability to defer the full gain requires the acquisition of qualifying replacement property

with the full proceeds realized within the replacement period.

Page Ref.: I:12-10

Objective: 2

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20) All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if

qualifying replacement property is acquired within the requisite period of time.

Answer: TRUE

Explanation: A taxpayer can elect deferral of realized gain due to an involuntary conversion if similar

property or property related in service is acquired within a specific time period.

Page Ref.: I:12-10Objective: 2

21) In an involuntary conversion, the basis of replacement property is its cost reduced by the gain

deferred.

Answer: TRUE

Explanation: The basis of the replacement asset will be its cost reduced by the gain deferred due to the

involuntary conversion election.

Page Ref.: I:12-10

Objective: 2

22) A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.

Answer: FALSEExplanation: Section 1033 does not apply to losses.

Page Ref.: I:12-11

Objective: 2

23) If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the

property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to

a party other than the governmental unit that is threatening to condemn the property.

Answer: TRUE

Explanation: The general involuntary conversion provisions are modified in the case of condemnation.

One such modification allows the sale of property to a third party when threat of condemnation exists.

Page Ref.: I:12-11

Objective: 2

24) When the cost of replacement property is less than the amount realized on an involuntary conversion,

gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the

replacement property, but not more than the total realized gain.

Answer: TRUE

Explanation: Proceeds from an involuntary conversion that are not invested in qualifying replacement

property will trigger gain recognition equal to the excess proceeds or the realized gain, if less.

Page Ref.: I:12-12

Objective: 2

25) If property is involuntarily converted into similar property, the basis and holding period of theconverted property carry over to the basis and holding period of the replacement property.

Answer: TRUE

Explanation: Because the gain on the original asset is deferred into the replacement property under the

involuntary conversion provisions, the holding period and basis of the original asset also carry over to the

replacement asset.

Page Ref.: I:12-12

Objective: 2

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26) If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the

replacement property begins on the date of purchase.

Answer: FALSE

Explanation: The holding period includes the holding period of the converted property.

Page Ref.: I:12-12

Objective: 2

27) Replacing a building with land qualifies as replacement property under the involuntary conversion

rules relevant to a casualty.

Answer: FALSE

Explanation: Qualification of replacement property is based on a functional use test.

Page Ref.: I:12-13

Objective: 2

28) If real property used in a trade or business or held for investment is condemned, it must be replaced

with property having a similar functional use.

Answer: FALSE

Explanation: The like-kind replacement property rules apply in the case of a condemnation of realproperty used in a trade or business or held for investment purposes.

Page Ref.: I:12-14

Objective: 2

29) Vector Inc.'s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally

settles with the insurance company on February 3, 2015. In order to defer the gain realized on the

building, Vector must acquire another office building by February 3, 2017.

Answer: FALSE

Explanation: The deadline for replacement is the end of the second tax year after the year in which the

gain is realized. The deadline will be December 31, 2017.


Objective: 2

30) When an involuntary conversion is due to the condemnation of real property held for productive use

in a trade or business or for investment, the replacement period will end three years after the close of the

first tax year in which any part of the gain is realized.

Answer: TRUE

Explanation: An extra year is added to the replacement period for condemnation of real estate.

Page Ref.: I:12-15

Objective: 2

31) A loss on the sale of a taxpayer's personal residence is deductible if the taxpayer owned and lived in

the home for two of five years.Answer: FALSE

Explanation: A loss is disallowed because the residence is a personal-use asset.

Page Ref.: I:12-16

Objective: 3

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32) In order for the gain on the sale of a personal residence to be excluded under Section 121, a

replacement residence must be purchased within two years.

Answer: FALSE

Explanation: There is no requirement for a replacement residence.

Page Ref.: I:12-16

Objective: 3

33) In the case of married taxpayers, an individual may claim the Sec. 121 exclusion even if the

individual's spouse used the exclusion within the past two years.

Answer: TRUE

Explanation: The exclusion is now determined on an individual basis.


Objective: 3

34) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.

Answer: FALSE

Explanation: The home must be the taxpayer's principal residence for two of the five years before the sale.

Page Ref.: I:12-16 and I:12-17Objective: 3

35) If a taxpayer owns more than one home, she can designate the home that will be considered her

principal residence for purposes of the Sec. 121 exclusion.

Answer: FALSE

Explanation: The determination of principal residence is based upon facts and circumstances such as

place of employment, voter registration, club memberships and numerous other factors.

Page Ref.: I:12-17 and I:12-18

Objective: 3

36) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be

excluded if the sale is due to a change in employment, health, or unforeseen circumstances.

Answer: TRUE

Explanation: Under specified circumstances a taxpayer may be allowed partial exclusion if the two-year

test is not met.

Page Ref.: I:12-19

Objective: 3

37) Ron and Fay live in Buffalo. They also own a condominium in Orlando (purchased in 2009) which they

rent to vacationers. Ron and Fay will be retiring. They plan to live in the Orlando property for two and a

half years. When they sell it, they will be able to exclude the full gain which is expected to be about

$200,000.

Answer: FALSEExplanation: The gain will be allocated between the rental period and the primary residence period.

Only the portion allocable to the primary residence period can be excluded. In addition, depreciation

must be recaptured.

Page Ref.: I:12-20

Objective: 3

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38) All of the following qualify as a like-kind exchange except

A) an apartment building held for investment for farmland used in a trade or business.

B) a printer used in trade or business for a computer used in trade or business.

C) improved real estate held for investment for unimproved real estate held for investment.

D) an airplane used in trade or business for a general purpose truck used in trade or business.

Answer: DExplanation: D) Real property used in business or for investment exchanged for any real property

qualifies as do computers and peripherals. An airplane and a truck are in different general asset classes

and are, therefore, not like-kind property.

Page Ref.: I:12-3 and I:12-4; Example I:12-3, I:12-4, I:12-7, and I:12-8

Objective: 1

39) Which of the following statements with respect to a like-kind exchange is false?

A) Property of one class must be exchanged for property of the same class.

B) An exchange of inventory does not qualify as a like-kind exchange.

C) Personal property must be exchanged for personal property.

D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind

exchange.

Answer: D

Explanation: D) Sale of property and subsequent purchase of like-kind property only qualifies if the two

transactions are interdependent.

Page Ref.: I:12-3 through I:12-5

Objective: 1

40) A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is

willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B

purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A's ranch. The

ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?

A) The transaction qualifies as a like-kind exchange for B but not for A.B) The transaction qualifies as a like-kind exchange for both B and A.

C) The transaction qualifies as a like-kind exchange for A but not for B.

D) The transaction does not qualify as a like-kind exchange for either B or A.

Answer: C

Explanation: C) The exchange is like-kind for A because she exchanges real property used in business

(the ranch) for investment property (the complex) in a direct exchange. The transaction is not a like-kind

exchange for B because she acquired the apartment complex for resale.


Objective: 1

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41) Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000

plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the

new parcel. Due to the exchange, Landry will recognize

A) $10,000 gain.

B) $5,000 gain.

C) $5,000 loss.D) $0.

Answer: D

Explanation: D) A loss is realized on the exchange ($45,000 amount realized less $50,000 adjusted basis).

The receipt of boot results in gain recognition only when gain has been realized on the transaction. There

is no recognition in the case of loss.

Page Ref.: I:12-6

Objective: 1

42) Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business

equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?

A) $0

B) $20,000

C) $40,000

D) $60,000

Answer: C

Explanation: C) Amount Realized ($40,000 + $140,000) - Adjusted Basis ($120,000) = $60,000 gain realized.

Gain is recognized to the extent of boot received$40,000.


Objective: 1

43) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business

equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?

A) $0B) $4,000

C) $6,000

D) $10,000

Answer: C

Explanation: C) Amount Realized ($10,000 + $96,000) - Adjusted Basis ($100,000) = $6,000 gain realized.

Gain recognized to the lesser of realized gain ($6,000) or boot received ($10,000).


Objective: 1

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44) Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV

and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle

is for personal use. What is the amount of recognized gain?

A) $0

B) $10,000

C) $20,000D) $30,000

Answer: B

Explanation: B) The realized gain is $30,000 [($80,000 + $10,000) amount realized - $60,000 adjusted

basis]. Gain is recognized to the extent of the lesser of gain realized or boot receivedthe motorcycle

($10,000) is non-like-kind property and is considered boot.


Objective: 1

45) Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela).

Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of

the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by

Pamela. Pamela must recognize a gain of

A) $ 0.

B) $ 40,000.

C) $ 120,000.

D) $ 140,000.

Answer: A

Explanation: A) Like-kind property was exchanged. Pamela received no boot so none of the gain is

recognized.

Page Ref.: I:12-7

Objective: 1

46) Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges thewarehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis

$240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob

receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the

exchange of

A) $80,000.

B) $120,000.

C) $190,000.

D) $200,000.

Answer: D

Explanation: D)

Property received: Land (FMV)

Cash

Debt assumed by Rebecca

Total

$320,000

40,000

80,000

$440,000

Minus: Basis of warehouse given up: (240,000)

Gain realized $200,000


Objective: 1

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47) Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She

exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is

worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by

Emily on the exchange is

A) $40,000.

B) $80,000.C) $120,000.

D) $160,000.

Answer: A

Explanation: A)

FMV of warehouse received $420,000

Minus: Basis given up:

Land

Cash

Debt assumed

(260,000)

( 40,000)

( 80,000)

Gain realized by Emily $ 40,000

Page Ref.: I:12-7; Example I:12-21Objective: 1

48) Glen owns a building that is used in business. The building is worth $200,000, but is subject to a

mortgage of $40,000. Glen's basis in the building is $120,000. Glen exchanges the building for investment

land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be

held for investment. Glen must recognize a gain of

A) $0.

B) $10,000.

C) $50,000.

D) $80,000.

Answer: C

Explanation: C)

Property received:

Land (FMV)

Cash

Debt assumed by other party

Total

$150,000

10,000

40,000

$200,000

Minus: Basis of building given up: (120,000)


Gain recognizedLesser of:

Boot received = cash + debt relief = $50,000, or

Realized gain of $80,000

$50,000


Objective: 1

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49) Kai owns an apartment building held for investment purposes. The apartment building is worth

$500,000, although it is subject to a mortgage of $100,000. Kai's basis in the apartment building is

$380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of

$350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party

assumes the apartment building mortgage. What is Kai's recognized gain on this exchange?

A) $0B) $50,000

C) $120,000

D) $150,000

Answer: C

Explanation: C)

Cash received $ 50,000

Liability transferred 100,000

Office building received 350,000

Total consideration received $500,000

Basis of apartment building 380,000


Gain recognized equals the lesser of boot received or gain realized.

The total boot received is $150,000 (100,000 debt relief + 50,000 cash), so the gain recognized is $120,000.


Objective: 1

50) In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of

$10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri's

basis in the new truck?

A) $5,000

B) $8,500

C) $13,500

D) $15,000

Answer: C

Explanation: C) Gain realized is $1,500 [$15,000 amount realized less ($8,500 + $5,000) adjusted basis of

property given]. No boot was received, so no gain is recognized. Basis is $15,000 FMV of new truck less

$1,500 unrecognized gain = $13,500. Or, an alternative way to calculate the basis in the truck is to total the

adjusted basis of property exchanged ($8,500 truck plus $5,000 cash paid) or $13,500.

Page Ref.: I:12-7

Objective: 1

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51) Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has

a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie's basis in the new equipment is

A) $130,000.

B) $140,000.

C) $160,000.

D) $170,000.Answer: B

Explanation: B) The gain realized is $170,000 (FMV of new equipment plus $30,000 cash) - $160,000

adjusted basis of old equipment = $10,000. She must recognize gain to the extent of the lesser of the boot

received or the realized gain so the full $10,000 realized gain is recognized. The basis of the new

equipment is [$160,000 (old basis) - 30,000 (boot received) + 10,000 (gain recognized)] = $140,000 or the

FMV of property received less unrecognized gain of $0 = $140,000.

Page Ref.: I:12-7

Objective: 1

52) Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis

$120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land

valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the

warehouse. Jason's basis in the land received will be

A) $120,000.

B) $150,000.

C) $180,000.

D) $200,000.

Answer: A

Explanation: A) Gain realized is $80,000 [($150,000 + $40,000 + $10,000) amount realized less $120,000

adjusted basis]. Gain is recognized to the extent of boot received$40,000 + $10,000 = $50,000. The basis

of the land is $120,000:

(1) FMV of property received ($150,000) less unrecognized gain ($30,000), or

(2) $120,000 basis of property exchanged - $50,000 boot received + $50,000 gain recognized.Page Ref.: I:12-7

Objective: 1

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53) Laurie owns land held for investment. The land's FMV is $150,000. Laurie's basis in the land is

$130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The

warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey's

basis in the warehouse is $120,000. Laurie's basis in the warehouse received will be

A) $150,000.

B) $170,000.C) $190,000.

D) $210,000.

Answer: C

Explanation: C)

Basis of property exchanged:

Land

Cash

Debt

$130,000

20,000

40,000

Basis of warehouse received: $190,000

Or FMV of property received ($210,000) less unrecognized gain ($20,000)Page Ref.: I:12-7

Objective: 1

54) Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment

with a $100,000 FMV and $20,000 of marketable securities. What is Rosa's basis for the new equipment?

A) $60,000

B) $80,000

C) $100,000

D) $120,000

Answer: A

Explanation: A) $60,000 basis of property exchanged - $20,000 boot received + $20,000 gain recognized =

$60,000


Objective: 1

55) If there is a like-kind exchange of property between related parties, how long do they have to wait to

dispose of the property received in order to avoid having to recognize any gain on the exchange?

A) 6 months

B) 1 year

C) 2 years

D) no waiting period

Answer: C

Explanation: C) Exchanges of property between related parties are not like-kind exchanges under currentlaw if either party disposes of the property within two years of the exchange.

Page Ref.: I:12-8

Objective: 1

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56) Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also

provided stock worth $25,000. Rolf's adjusted basis in the building and stock is $130,000 and $11,000,

respectively. How much gain will Rolf recognize on the exchange?

A) $0

B) $14,000

C) $20,000D) $34,000

Answer: B

Explanation: B) The stock exchanged by Rolf is not qualifying like-kind property so its gain must be

recognized in the normal manner.


Objective: 1

57) Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also

provided

stock worth $25,000. Yael's adjusted basis in the building and stock is $180,000 and $11,000, respectively.

How much gain or loss will Yael recognize on the exchange?

A) $0

B) ($30,000)

C) ($16,000)

D) $14,000

Answer: D

Explanation: D) As part of the exchange, Yael exchanged non-like-kind property (the stock). He will

recognized the gain on the stock, but cannot recognize the loss realized on the like-kind property.


Objective: 1

58) Which of the following statements is not true with regard to like-kind exchanges?

A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.B) The holding period of like-kind property received includes the holding period of the property

exchanged.

C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a

personal use car) in an otherwise like-kind exchange.

D) The basis of property received in an exchange is equal to the basis of the property exchanged less the

boot received plus the gain recognized and less any loss recognized.

Answer: C

Explanation: C) While gain or loss equal to the difference between the FMV and the adjusted basis of the

non-like-kind property surrendered must ordinarily be recognized, if non-like-kind property is a personal

use asset, the loss is not recognized.

Page Ref.: I:12-10; Topic Review I:12-1Objective: 1

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59) All of the following are true except:

A) A nonsimultaneous exchange may never qualify as a like-kind exchange.

B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.

C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an

otherwise like-kind exchange.

D) The holding period of like-kind property received includes the holding period of the propertyexchanged.

Answer: A

Explanation: A) A nonsimultaneous exchange can qualify as like-kind exchange if the transactions are

interdependent.

Page Ref.: I:12-10; Topic Review I:12-1

Objective: 1

60) Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the

painting on September 5, 2014, for a Picasso sculpture and marketable securities to be held as an

investment. On what date does the sculpture's holding period begin?

A) June 1, 2008

B) June 2, 2008

C) September 5, 2014

D) September 6, 2014

Answer: A

Explanation: A) It is a qualifying like-kind exchange so the holding period carries over to the qualifying

replacement property.

Page Ref.: I:12-9 and I:12-10; Example I:12-31

Objective: 1

61) Juan's business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of

depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due

to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gainrecognition?

A) $40,000

B) $32,000

C) $10,000

D) $22,000

Answer: B

Explanation: B) The taxpayer must replace the property with qualifying replacement property at a cost

equal to or greater than the amount realized.

Page Ref.: I:12-10

Objective: 2

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62) Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted

basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was

reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another

business building. If the proper election is made, Stephanie will recognize gain of

A) $ 0.

B) $15,000.C) $20,000.

D) $25,000.

Answer: C

Explanation: C)

Insurance proceeds $200,000

Minus: Adjusted basis of old building ( 175,000)

Equals: Gain realized $ 25,000


Minus: Proceeds reinvested ( 180,000)

Equals: Proceeds not reinvested $ 20,000

Gain recognized:Lesser of: 1. Gain realized

2. Proceeds not reinvested

$ 25,000

20,000

Gain recognized $ 20,000


Objective: 2

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63) Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted

basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was

reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another

business building. Assuming the proper election is made to defer gain, Stephanie's basis in the new

building will be

A) $175,000.B) $180,000.

C) $200,000.

D) $210,000.

Answer: A

Explanation: A)






Equals: Proceeds not reinvested $ 20,000Gain recognized:

Lesser of: 1. Gain realized


$ 25,000

20,000


Cost of new building $180,000

Less deferred gain ($25,000 - 20,000) -5,000

Basis of replacement building $175,000


Objective: 2

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64) Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the

building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed

$300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building.

Ron will recognize gain of

A) $0.

B) $30,000.C) $60,000.

D) $90,000.

Answer: C

Explanation: C)







Gain recognized:Lesser of: 1. Gain realized


$ 90,000

60,000



Objective: 2

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69) Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a

tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for

$550,000. What is the amount of gain recognized on the transaction?

A) $0

B) $50,000

C) $350,000D) $400,000

Answer: D

Explanation: D) The gain realized is $400,000 ($1,000,000 - $600,000). The amount realized from the

involuntary conversion exceeds the cost of replacement property by $450,000 ($1,000,000 - $550,000 =

$450,000). Therefore, the entire $400,000 realized gain is recognized.


Objective: 2

70) The building used in Manuel's business was condemned by the city of Mobile. Manuel received a

condemnation award of $220,000. He paid $800 in lawyer's fees and $600 for an appraisal of the property.

Manuel's adjusted basis in the building was $120,000. Manuel reinvests in similar property costing

$200,000, and Manuel makes the proper election regarding the property. Manuel's basis in the new

building is

A) $102,400.

B) $121,400.

C) $120,000.

D) $200,000.

Answer: B

Explanation: B)

Cost of new building $200,000

Minus: Deferred gain (Gain realized = $220,000

- $120,000 - $800 - $600 = $98,600; $98,600

realized minus $20,000 gain recognized) ( 78,600)

Basis of new building $ 121,400


Objective: 2

71) Which of the following statements regarding involuntary conversions is incorrect?

A) With some exceptions, the replacement property must be similar or related in service or use to the

property converted.

B) The functional-use test is more restrictive than the like-kind test.

C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.

D) Real property used in a trade or business that is condemned must be replaced with property which

has the same functional use as the converted property.Answer: D

Explanation: D) Condemned real property may be replaced with like-kind property.


Objective: 2

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72) Each of the following is true of deferral of gain attributable to the involuntary conversion of personal

property with the exception of

A) gain deferral is elective, except for direct conversions.

B) the replacement property may be acquired by gift, inheritance, or purchase.

C) qualifying replacement property must be acquired within a specified time period.

D) replacement property must be similar or related in service or use to the converted property.Answer: B

Explanation: B) The general rule is that the taxpayer must purchase replacement property.

Page Ref.: I:12-13 through I:12-15; Topic Review I:12-2

Objective: 2

73) Alex owns an office building which the state condemns on January 15, 2014. Alex receives the

condemnation award on April 1, 2014. In order to qualify for nonrecognition of gain on this involuntary

conversion, what is the last date for Alex to acquire qualified replacement property?

A) January 15, 2016

B) January 15, 2017

C) December 31, 2016

D) December 31, 2017

Answer: D

Explanation: D) If real property used in a business is condemned, the replacement period ends three

years after the close of the first tax year in which any part of the gain is realized.


Objective: 2

74) According to Sec. 121, individuals who sell or exchange their personal residence may exclude part or

all of the gain if the house was owned and occupied as a principal residence for

A) at least five years immediately before the sale date.

B) at least one year of the three-year period before the sale date.

C) at least two years of the five-year period before the sale date.D) at least five years of the ten-year period before the sale date.

Answer: C

Explanation: C) The residence had to be owned and occupied as a principal residence for at least two

years in a five year period before the sale or exchange.

Page Ref.: I:12-16

Objective: 3

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75) Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie. Sophie

pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and

$1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is

$125,000. What is the amount of gain recognized on the sale?

A) $0

B) $100,000C) $165,000

D) $170,000

Answer: A

Explanation: A) Their realized gain of $165,000 is not recognized because they meet the requirements of

Section 121.

Amount realized ($225,000 + $70,000 - $4,000 - $1,000) $290,000

Adjusted basis 125,000



Objective: 3

76) Bob and Elizabeth, both 55 years old and married, sell their personal residence to Wolfgang. Wolfgang

pays $660,000 and assumes their $90,000 mortgage. To make the sale they pay $20,000 in commissions and

$10,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is

$200,000. What is the amount of gain recognized on the sale?

A) $0

B) $20,000

C) $50,000

D) $520,000

Answer: B

Explanation: B)

Amount realized ($660,000 + $90,000 - $20,000 - $10,000) $720,000

Basis ( 200,000)

Realized Gain $520,000

Maximum amount to be excluded 500,000

Recognized Gain $ 20,000


Objective: 3

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77) Frank, a single person age 52, sold his home this year. He had lived in the house for 10 years.

He signed a contract on March 4 to sell his home and closed the sale on May 3.

Sales price $202,000

Selling expenses 12,000

Replaced and paid for a broken window on March 2 200Basis of old home before repairs and improvements 150,000

Based on these facts, what is the amount of his recognized gain?

A) $0

B) $39,800

C) $40,000

D) $52,000

Answer: A

Explanation: A) He meets the requirements under Sec. 121.

Sales proceeds $202,000Minus: Selling expenses ( 12,000)

Amount realized $190,000

Minus: Basis of old home ( 150,000)

Gain realized $ 40,000

Section 121 exclusion 40,000

Gain recognized $ 0


Objective: 3

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78) Pierce, a single person age 60, sold his home this year. He had lived in the house for 10 years. He

signed a contract on March 4 to sell his home.

Sales price $600,000

Selling expenses 15,000

Replaced and paid for a broken window on March 2 800Basis of old home before repairs and improvements 310,000

Based on these facts, what is the amount of his recognized gain?

A) $0

B) $25,000

C) $40,000

D) $275,000

Answer: B

Explanation: B) He meets the requirements under Sec. 121.

Sales proceeds $600,000Minus: Selling expenses ( 15,000)


Minus: Basis of old home (310,000)


Section 121 exclusion 250,000



Objective: 3

79) On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were

$20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paidfor two weeks prior to the sale of her home. Ingrid's basis in her old home was $180,000. Ingrid's realized

gain upon the sale of her first home is

A) $ 0.

B) $40,000.

C) $50,000.

D) $70,000.

Answer: C

Explanation: C)

Sales proceeds $250,000

Minus: Commissions ( 20,000)

Amount realized $230,000Minus: Basis of old home ( 180,000)



Objective: 3

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80) William and Kate married in 2014 and purchased a new home together. Each had owned and lived in

separate residences for the past 5 years. William's adjusted basis in his old residence was $200,000; Kate's

adjusted basis in her old residence was $120,000. In late 2014, William sells his residence for $500,000

while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in

2014?

A) $0B) $250,000

C) $320,000

D) $370,000

Answer: C

Explanation: C) William:


Basis (200,000)

Realized Gain 300,000


Recognized Gain $ 50,000

Kate:


Basis (120,000)

Realized Gain $ 70,000


Recognized Gain $ 0


Objective: 3

81) All of the following statements are true with regard to personal residences except:

A) Temporarily renting property that was formerly the taxpayer's principal residence does notautomatically preclude the use of Sec. 121.

B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer's

principal residence or a secondary residence.

C) In the case of married taxpayers, an individual may claim the exclusion even if the individual's spouse

used the exclusion within the past two years.

D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.

Answer: B

Explanation: B) Only the principal residence qualifies for the exclusion.


Objective: 3

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82) Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only

one sale or exchange every

A) six months.

B) year.

C) two years.

D) five years.Answer: C

Explanation: C) The full exclusion provided by Sec. 121 applies to only one sale or exchange every two

years.

Page Ref.: I:12-18

Objective: 3

83) Jenna, who is single, sold her principal residence on December 1, 2013, and excluded the $150,000 gain

because she met the ownership and usage requirements under Sec. 121. Jenna purchased another

residence in Pensacola on January 1, 2014 that she occupied until July 1, 2014 when she receives a new job

offer from an employer in Miami. She sells the Pensacola residence on October 1, 2014 and realizes a gain

of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2014?

A) $0

B) $10,000

C) $20,000

D) $40,000

Answer: A

Explanation: A) Since she has not met the two-year ownership and usage requirement on the Pensacola

house the exclusion must be prorated. Months of usage in the Pensacola house are 6 months. The

exclusion is 6/24, or 1/4 of $250,000 ($62,500). Therefore, none of the gain is taxable.Page Ref.: I:12-18; Example I:12-57

Objective: 3

84) Which of the following statements is false with regard to the ownership and use tests under Sec. 121?A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.

B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be

excluded if the sale is due to a change in employment, health, or unforeseen circumstances.

C) For purposes of the two-year ownership rule, a taxpayer's period of ownership includes the period

during which the taxpayer's deceased spouse owned the residence.

D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the

taxpayer's period of owning the property includes the time the residence was owned by the spouse or ex-

spouse.

Answer: A

Explanation: A) The property does not have to be one's principal residence at time of the sale to qualify

for the exclusion.Page Ref.: I:12-18

Objective: 3

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85) Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use

and ownership tests are satisfied?

A) change in employment that meets the requirement for a moving expense deduction

B) increased traffic due to widening of a road

C) birth of one child

D) divorceAnswer: A

Explanation: A) Of the responses provided, only the change in employment requiring a move would

allow a partial exclusion.

Page Ref.: I:12-19

Objective: 3

86) Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion

of a gain on the sale of a home?

A) loss of employment by the qualified individual if the individual is eligible for unemployment

compensation

B) natural or man-made disaster resulting in a casualty to the residence

C) birth of one child

D) divorce or legal separation

Answer: C

Explanation: C) Under the regulations, multiple, but not single, births are considered to qualify as

unforeseen circumstances.

Page Ref.: I:12-19

Objective: 3

87) Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions.

Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?

A) Expected higher tax rates in the future.

B) Less accelerated depreciation provisions expected in the future.C) A decline in the value of the asset being disposed of.

D) None of the above.

Answer: C

Explanation: C) A decline in the value of an asset indicates a loss will be realized. Taxpayers will

generally want to avoid like-kind treatment in order to recognize the loss.

Page Ref.: I:12-20

Objective: 4

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88) Which of the following statements in not correct regarding the compliance requirements of an

involuntary conversion?

A) The taxpayer elects the deferral by not reporting the gain as income for the first year in which the gain

is realized although all relevant information regarding the vent will be reported.

B) A taxpayer who recognized the full gain and paid the taxes can later file a refund claim to elect the

deferral if qualified property is acquired before the expiration of the replacement period.C) A taxpayer elects to defer the full gain in the year the gain is realized (year one), and no gain is

reported on that year's tax return. Qualified replacement property is acquired in the following year (year

two), but the full insurance proceeds are not spent so some gain must be recognized. The partial gain

recognition will be reported on the tax return for year two.

D) A taxpayer properly elected to defer the full realized gain in year one and provides appropriate

information on the replacement property. The taxpayer cannot later revoke the election and designate a

different property as the replacement property.

Answer: C

Explanation: C) An amended return is required if the cost of the replacement property is less than

expected at the time of the election.

Page Ref.: I:12-23

Objective: 5

89) Indicate with a "yes" or a "no" which of the following are like-kind exchanges.

a.Computer used in trade or business for office furniture used in trade or business.

b.Apartment building held as an investment for an office building used in trade or business.

c.Land used in trade or business for equipment used in trade or business.

d.Printer used in trade or business for printer used for personal purposes.

e.Exchange of improved real estate held for investment for unimproved real estate held for investment.

Answer:

a. No; b. Yes; c. No; d. No; e. Yes


Objective: 1

90) Indicate with a "yes" or a "no" which of the following are like-kind exchanges (assume all assets are

held for business or investment purposes).

a.Exchange of common stock held as an investment for land held as an investment.

b.Exchange of farmland for an apartment building.

c.Exchange of office furniture used in trade or business for computer used in a trade or business

d.Exchange of unimproved real estate for improved real estate.

e.Exchange of automobile used in trade or business for office building used in trade or business

Answer:

a. No; b. Yes c. No; d. Yes; e. No

Page Ref.: I:12-3 through I:12-5Objective: 1

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91) Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair

market value to be used in business.

a.What is the amount of gain or loss realized by Amelia?

b.What is the amount of gain or loss recognized by Amelia?

Answer:

a.$560,000 - $350,000 = $210,000 gain realizedb.All $210,000 gain realized is also recognized as the property does not qualify as like kind.


Objective: 1

92) Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of

$60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair

market value.

a.If Cheryl and John exchange their stock, what is the amount of Cheryl's realized gain?

b.If Cheryl and John exchange their stock, what is the amount of Cheryl's recognized gain?

Answer:

a.$75,000 - $60,000 = $15,000 realized gain.

b.All $15,000 of the gain is recognized because the exchange is neither a like-kind exchange nor an

exchange of stock for stock of the same corporation.


Objective: 1

93) Kevin exchanges an office building used in his business for another office building worth $200,000

plus $30,000 cash. The FMV of Kevin's old building is $280,000 (basis $150,000) and it is subject to a

mortgage of $50,000. The mortgage is assumed by the other party.

a.What is the amount of gain realized by Kevin?

b.What is the amount of gain recognized by Kevin?

c. What is the basis of the new building to Kevin?

Answer:a.Property received:

Office building (FMV) $200,000

Cash 30,000

Debt assumed by other party 50,000

Total $280,000

Minus: Basis of office building given up: (150,000)


b.Gain recognized to the extent of boot received$30,000 cash + $50,000 debt assumed = $80,000.

c. $150,000 determined as follows:(1) FMV of property received ($200,000) less unrecognized gain ($50,000), or

(2)$150,000 basis of property exchanged - $80,000 boot received + $80,000 gain recognized.

Page Ref.: I:12-7; Examples I:12-21 and I:12-23

Objective: 1

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94) Summer exchanges an office building used in her business for another office building. Summer's office

building has a FMV of $250,000 (basis of $180,000). The FMV of the new building is $300,000, and it is

subject to a mortgage of $60,000, which is assumed by Summer. Summer also pays the other party $40,000

cash.

a.What is the amount of gain realized by Summer?

b.What is the amount of gain recognized by Summer?c. What is the basis of the new building to Summer?

Answer:

a.FMV office building received $300,000

Minus: Basis given up:

Office building (180,000)

Cash ( 40,000)

Debt assumed ( 60,000)

Gain realized by Summer $ 20,000

b.Summer recognizes no gain since this is a nontaxable exchange and she received no boot.

c.Basis of property received:

Office building exchanged $180,000

Cash paid 40,000

Debt assumed 60,000

Basis of office building received: $280,000

Or FMV of property received ($300,000) less unrecognized gain ($20,000).

Page Ref.: I:12-7; Examples I:12-22 and I:12-23

Objective: 1

95) Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000

cash and a trotter (another racehorse) with a $150,000 fair market value.

a.What is the amount of gain realized by Trent?

b.What is the amount of gain recognized by Trent?

c.What is the adjusted basis of the trotter?

Answer:

a. The gain realized is $110,000 [($150,000 + 40,000) - $80,000].

b.The amount of gain recognized is $40,000, the amount of boot received.

c.The basis for the replacement property is $80,000 ($80,000 basis of property exchanged - $40,000 boot

received + $40,000 gain recognized) or $80,000 ($150,000 FMV of property received less $70,000 gain not

recognized).


Objective: 1

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96) Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office

equipment with a fair market value of $12,000.

a.What is the gain or loss realized?

b.What is the gain or loss recognized?

c. What is the adjusted basis of the new office equipment?

Answer:a. There is a realized loss of $3,000 [($5,000 + $12,000) amount realized less $20,000 adjusted basis].

b.There is no loss recognized as it is a like-kind exchange. The loss is not recognized as the receipt of

boot does not cause loss to be recognized.

c.The basis of the new equipment is $20,000 basis of property exchanged less $5,000 boot received or

$15,000. Alternatively, the basis can be determined as FMV of the new property ($12,000) plus deferred

loss ($3,000) or $15,000.

Page Ref.: I:12-7; Example I:1:2-24

Objective: 1

97) Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000

fair market value. In addition, he receives $20,000 of marketable securities.

a.What is the amount of gain realized by Eric?

b.What is the amount of gain recognized by Eric?

c.What is Eric's basis in the new printing press?

d.What is Eric's basis in the marketable securities?

Answer:

a. The realized gain is $56,000 [($100,000 + $20,000) - $64,000].

b.$20,000. The recognized gain is the lesser of the boot ($20,000) or the realized gain ($56,000).

c. The basis for the printing press is $64,000 ($64,000 basis of property exchanged less $20,000 boot

received plus $20,000 gain recognized).

d.The basis for the marketable securities is the FMV of $20,000.


Objective: 1

98) Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger

parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV

of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.

a.What is the amount of gain realized and recognized by Olivia on each asset?

b.What is the amount of Olivia's basis in the new land?

Answer:

a.

Land (L-K asset) Securities (boot)

Amount realized ($110,000 total) $75,000 $35,000

Less adjusted basis 50,000 20,000Realized gain $25,000 $15,000

Recognized gain $0 $15,000

No boot is received

b.Olivia's basis in the new land is: $85,000:

$50,000 basis of old land + $20,000 of marketable securities + 15,000 gain recognized, or

$110,000 FMV new land - $25,000 unrecognized gain


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Objective: 1

99) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV.

Whitney's basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a

$10,000 FMV as part of the exchange.

a.What is the amount, if any, of gain or loss recognized on the transaction?

b.What is the basis of the undeveloped land?

Answer:

a.

Timberland (L-K asset) Tractor (boot)


Less adjusted basis 150,000 15,000

Realized gain (loss) $140,000 ($5,000)

Recognized gain (loss) $0 ($5,000)

No boot is received

The tractor is non-like-kind property. Therefore, Whitney will recognize the loss on the transfer of $5,000($10,000 FMV - $15,000 basis).

b.Whitney's basis for the undeveloped land is $160,000:

$150,000 basis of timberland + $15,000 basis of tractor - $5,000 loss recognized, or

$300,000 FMV undeveloped land - $140,000 unrecognized gain.


Objective: 1

100) Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth

$850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for

$40,000.

a. What are Marinda's realized and recognized gains (losses) on the two assets exchanged?

b. What is Marinda's basis in the warehouse acquired?

Answer:

a.

Office (L-K asset) Securities (boot)


Less adjusted basis 820,000 40,000

Realized gain (loss) ($20,000) $10,000

Recognized gain (loss) $0 $10,000

Loss cannot be recognized on like-kind property.

b.Marinda's basis in the warehouse is: $870,000:

$820,000 basis of office + $40,000 of marketable securities + 10,000 gain recognized, or

$850,000 FMV warehouse + $20,000 unrecognized loss


Objective: 1

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101) Luke's offshore drilling rig with a $700,000 adjusted basis is destroyed by a hurricane. He collects

$620,000 from the insurance company and purchases a new drilling rig for $600,000.

a.What are the tax consequences of these transactions?

b.What is the basis of the new rig?

Answer:

a.A taxpayer may not defer recognition of loss from an involuntary conversion. Therefore the $80,000loss ($620,000 - $700,000) is recognized as a casualty loss.

b.The basis of the new rig is $600,000.


Objective: 2

102) An office building owned by Abby and used in her business was destroyed in a fire. Abby's adjusted

basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was

reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another

business building.

a.Assume Abby made the proper election with regard to the involuntary conversion. What is the

amount of gain to be recognized by Abby?

b.What is Abby's basis in the new building?

Answer:

a.Insurance proceeds $160,000






Gain recognized:

Lesser of: 1. Gain realized $ 15,000

2. Proceeds not reinvested 10,000


b.Cost of new building $150,000

Minus: Deferred gain ($15,000 gain

realized minus $10,000 gain recognized) ( 5,000)

Basis of new building $145,000


Objective: 2

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103) Mick owns a racehorse with a $500,000 basis used for breeding purposes. The racehorse is killed in

an accident and Mick receives $750,000 from the insurance company. Mick purchases another racehorse

for $400,000.

a.What is the amount of Mick's realized gain?

b.What is the amount of Mick's recognized gain?

Answer:a.Amount realized $750,000

Less: Adjusted basis 500,000


b.Amount realized from the involuntary conversion $750,000

Investment in new property 400,000

Amount in excess of reinvestment $350,000

Gain recognized is $250,000 because the realized gain is less than the unreinvested proceeds.


Objective: 2

104) Theresa owns a yacht that is held for personal use and has a $100,000 basis. The yacht is destroyed by

a storm and Theresa collects $120,000 from the insurance company. She purchases a new $150,000 yacht

for personal use and elects to defer any gain on the transaction. What is the basis of the new yacht?

Answer: Theresa's realized gain is $20,000 ($120,000 - $100,000). The deferred gain reduces the basis of

the new yacht. The new yacht's basis is $130,000 ($150,000 - $20,000).


Objective: 2

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105) Kareem's office building is destroyed by fire on April 11, 2014. Settlement is reached with the

insurance company on November 1, 2014 when he receives a check for $900,000. The property had

recently been appraised for $920,000. Kareem's adjusted basis in the building was $800,000.

a.What is Kareem's realized gain or loss?

b.Assume Kareem wishes to defer the maximum amount of gain. Indicate:

(1) the minimum amount that must be spent on a new property.(2) any restrictions on the new property in order for it to qualify.

(3) the deadline for placing the new property in service.

c. Assume that instead of a fire, the state forces Kareem to sell the property. Indicate how your

responses to part b would differ.

Answer:

a. Realized gain = $100,000 ($900,000 insurance proceeds less $800,000 adjusted basis).

b.

1. To avoid any gain recognition, Kareem must re-invest the full $900,00 proceeds in qualifying

property.

2. The replacement property must also be an office building.

3. The replacement deadline will be December 31, 2016.c.

1. To avoid any gain recognition, Kareem must re-invest the full $900,00 proceeds in qualifying

property (same as in the case of a casualty).

2. The replacement property must satisfy the like-kind requirements so he must re-invest in real

property used for business or investment purposes, but not necessarily an office building..

3. The replacement deadline will be December 31, 2017.


Objective: 2

106) Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she

purchased ten years ago for $435,000.

a.What is the amount of Nicki's recognizedgain on the sale?

b.Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki's recognized

gain on the sale?

c.Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in

the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?

Answer:

a. While Nicki's realized gain is $235,000 ($435,000 - $200,000), none of the gain is recognized since she

has owned and lived in the home for at least two of five years and, as a single person, she may exclude up

to $250,000 gain.

b.Nicki's realized gain is $285,000 ($485,000 - $200,000). She may exclude the first $250,000 of the gain.

The remaining $35,000 gain is recognized.

c. Nicki and Mike's realized gain is $285,000 ($485,000 - $200,000). A married filing jointly couple mayexclude up to $500,000 of the gain if they have owned and lived in the home for two of five years.

Page Ref.: I:12-16; Example I:12-49, I:12-50, and I:12-51

Objective: 3

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107) In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the

house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the

provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a

former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed

central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs.

What is the adjusted basis of the home?Answer:

The adjusted basis of the house is $205,000:

Purchase price $200,000

Closing costs ($5,000 + 3,000) 8,000

Deferred gain -30,000

Improvements ($15,000 + 12,000) 27,000

Adjusted basis $205,000

Repairs do not affect the basis.


Objective: 3

108) James and Ellen Connors, who are both 50 years old and married, sell their personal residence on

July 25, 2014 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000.

They purchased a new home for $1,000,000 in August 2014. After living in that home for 219 days, the

Connors were forced to sell their new home in 2015 for $1,300,000 and move to another climate due to

Ellen's severe health problems.

a.What is the amount of gain recognized on the home sale in 2014?

b.What is the amount of the gain recognized on the home sale in 2015?

Answer:

a.Sales proceeds $ 950,000



Section 121 exclusion ( 500,000)


b.Sales proceeds $1,300,000

Minus: Basis of old home (1,000,000)




Amount excludable: 219/730 = 30% (rounded) $500,000 = $150,000 excludablePage Ref.: I:12-18; Example I:12-57

Objective: 3

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109) Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by

Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home

for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for

$790,000. What is the amount of Amber's recognized gain on the sale of the home?

Answer: Amber's realized gain is ($790,000 - $500,000) = $290,000. Because her period of ownership

includes the four years Jonathan owned the residence, she qualifies under Section 121. The first $250,000of the gain is excluded; the remaining $40,000 is LTCG.


Objective: 3

110) The Smiths owned and used their principal residence, with an adjusted basis of $250,000, for ten

years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six

months later, they purchase another residence for $850,000.

a.What is the amount of gain the Smiths must recognize?

b.What is the basis of the new residence?

Answer:

a.Insurance proceeds $800,000




Remaining gain to be deferred $ 50,000

No gain is currently recognized.

b.Basis of new home is $850,000 less deferred gain $50,000 = $800,000.


Objective: 3

111) Discuss the basis rules of property received in a nontaxable like-kind exchange.

Answer: The basis of property received in a nontaxable exchange is equal to the adjusted basis of theproperty given in exchange (including boot property given) increased by gain recognized and reduced by

any boot received or loss that is recognized on the exchange. An alternative approach is to start with the

FMV of the like-kind property received and either increase it by deferred loss or increase it by deferred

gain. The basis of non-like-kind property received is an amount equivalent to its FMV at the date of the

exchange.


Objective: 1

112) Discuss the rules regarding the holding period for like-kind property received in a nontaxable

exchange.

Answer: The holding period of like-kind property received in a nontaxable exchange includes theholding period of the property exchanged. As a practical matter, the holding period of the property

exchanged carries over to the holding period of the like-kind property received. This carryover holding

period rule only applies if the like-kind property surrendered is a capital asset or an asset that is Sec. 1231

property.

Page Ref.: I:12-9

Objective: 1

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113) May a taxpayer elect under Sec. 1033 to defer recognition of loss resulting from an involuntary

conversion?

Answer: Sec. 1033 does not apply to losses realized from an involuntary conversion. A taxpayer may not

elect to defer recognition of a loss resulting from an involuntary conversion.

Page Ref.: I:12-11

Objective: 2

114) Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They

are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home

costing approximately $600,000. What should they consider before selling their home?

Answer: Under Section 121, if Ike and Tina own and live in the home (their principal residence) for at

least two years (in a five year period), up to $500,000 of the gain on the sale will be excluded from income.

No reinvestment is required. It would also be necessary to know the reason that Ike and Tina are

considering the sale. If the sale is due to a change in employment, health reason, or unforeseen

circumstances, at least partial gain exclusion is available even though they have not lived in the residence

for the entire two years.


Objective: 3

115) Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Answer: If the sale of the property results in a gain, a taxpayer may want to recognize the gain because

due to business operating losses or losses realized on other assets, there may be no taxes due on the gain

or a low level of tax. Recognition of the gain would increase the basis of the property received, thus

permitting higher depreciation if depreciation is allowable. In addition, the taxpayer should weigh

marginal tax rates today against anticipated marginal tax rates in the future, taking time value of money

into account.

If sale of the property would produce a loss, the taxpayer would likely want to sell in order to recognize

the loss. A loss realized on a non-taxable exchange is not recognized.Page Ref.: I:12-21 and I:12-22

Objective: 4

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