Chapter-15 - chapter 15 PDF

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Chapter 15 - Property Transactions: Nontaxable Exchanges 1. Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer’s relative economic position. ANSWER: False 2. Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment. ANSWER: False 3. In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is permanent. ANSWER: True 4. In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized gain, but receives a new basis if there is a realized loss. ANSWER: False 5. The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses. ANSWER: False 6. Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock. Leonore’s adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000. Leonore’s recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000. ANSWER: False 7. Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months. ANSWER: False 8. To qualify as a like-kind exchange, real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years. ANSWER: False 9. The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange. ANSWER: False 10. Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment. ANSWER: True 11. A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment. ANSWER: True 12. Pat owns a 1965 Ford Mustang which he uses for personal use. He purchased it four years ago for $22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000. Pat’s

Chapter 15 - Property Transactions: Nontaxable Exchanges recognized gain is $0 and his adjusted basis for the convertible is $22,000. ANSWER: False

13. Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business. If Clark is Kate’s father, her realized gain of $150,000 must be recognized because they are related parties. ANSWER: False 14. An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer’s trade or business. ANSWER: False 15. If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain. ANSWER: True 16. Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000). In addition, she receives $100,000 of cash. Shari’s recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain). ANSWER: False 17. When boot in the form of cash is given in a like-kind exchange, recognized gain is the greater of the boot or the realized gain. ANSWER: False 18. The surrender of depreciated boot (fair market value is less than adjusted basis) in a like-kind exchange can result in the recognition of loss. ANSWER: True 19. Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000). In addition, he receives cash of $6,000. If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain). ANSWER: False 20. The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount. ANSWER: False 21. Terry exchanges real estate (acquired on August 25, 2009) held for investment for other real estate to be held for investment on September 1, 2015. None of the realized gain of $10,000 is recognized, and Terry’s adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry’s holding period for the new real estate begins on August 25, 2009.

Chapter 15 - Property Transactions: Nontaxable Exchanges ANSWER: True 22. If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange. ANSWER: False 23. If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction. ANSWER: False

24. An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer’s property. ANSWER: True 25. Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses. ANSWER: False 26. The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer. ANSWER: True 27. Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test. ANSWER: False 28. Milt’s building which houses his retail sporting goods store is destroyed by a flood. Sandra’s warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion). ANSWER: False 29. Sidney, a calendar year taxpayer, owns a building (adjusted basis $450,000) in Columbus, OH, in which he conducts his retail computer sales business. The building is destroyed by fire on December 12, 2015, and two weeks later he receives insurance proceeds of $600,000. Due to family ties, Sidney decides to move to Columbia, SC. He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2, 2016. By electing § 1033, Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost – $150,000 postponed gain). ANSWER: True 30. Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a

Chapter 15 - Property Transactions: Nontaxable Exchanges tornado in October 2015. He receives insurance proceeds of $250,000 in January 2016. If before 2019, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain. ANSWER: True 31. If a taxpayer reinvests the net proceeds (amount received – related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain. ANSWER: True 32. The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property. ANSWER: True 33. A realized gain on an indirect (conversion into money) involuntary conversion of business property can be postponed, but a realized loss on an indirect involuntary conversion of business property cannot be postponed. ANSWER: True 34. Gil’s office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss. One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000. His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss). ANSWER: False 35. Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment. ANSWER: False 36. If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain). ANSWER: False 37. If there is an involuntary conversion (i.e., casualty, theft, or condemnation) of the taxpayer’s principal residence, the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence. ANSWER: True 38. The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply. ANSWER: False 39. At a particular point in time, a taxpayer can have two principal residences for § 121 exclusion purposes. ANSWER: False 40. To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

Chapter 15 - Property Transactions: Nontaxable Exchanges ANSWER: False 41. A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period. ANSWER: False 42. Wyatt sells his principal residence in December 2015 and qualifies for the § 121 exclusion. He sells another principal residence in November 2016. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence. ANSWER: False 43. Kendra owns a home in Atlanta. Her company transfers her to Chicago on January 2, 2015, and she sells the Atlanta house in early February 2015. She purchases a residence in Chicago on February 3, 2015. On December 15, 2015, Kendra’s company transfers her to Los Angeles. In January 2016, she sells the Chicago residence and purchases a residence in Los Angeles. Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home. ANSWER: False 44. The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

45. Deidra has owned and occupied her principal residence for 10 years. Two and one-half years ago she married Doug who moved into her house. Doug has never owned a home. When Deidra is transferred to another city, she sells the house and has a realized gain of $425,000. Deidra can exclude the realized gain of $425,000 from her gross income under § 121 if she and Doug file a joint return. ANSWER: True 46. Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000. ANSWER: True 47. Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt’s recognized gain is $25,000 and his basis for the new residence is $385,000. ANSWER: True 48. A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions. ANSWER: True

Chapter 15 - Property Transactions: Nontaxable Exchanges 49. Owen and Polly have been married for five years. Owen sells investment property to Polly for a realized gain of $140,000. Owen’s gain of $140,000 is not recognized and Polly’s basis for the property she purchased is her cost. ANSWER: False 50. Which of the following statements is correct? a. In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer’s cost or other basis for tax purposes. b. In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer’s cost or other basis for tax purposes. c. In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer’s cost or other basis for tax purposes. d. All of the above. e. None of the above. ANSWER: c 51. In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied? a. The form of the transaction is a sale or exchange. b. Both the property transferred and the property received are held either for productive use in a trade or business or for investment. c. The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property. d. Only a. and b. e. a., b., and c. ANSWER: b

52. Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange? a. Partnership interest for a partnership interest. b. Inventory for inventory. c. Securities for personalty. d. Business realty for investment realty. e. None of the above. ANSWER: d 53. Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 likekind exchange treatment? a. Mexico City, Mexico. b. Toronto, Canada. c. Paris, France.

Chapter 15 - Property Transactions: Nontaxable Exchanges d. Only a. and b. e. None of the above. ANSWER: e 54. Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily’s building is $120,000 and the fair market value is $170,000. Which of the following statements is correct? a. Lily’s recognized gain is $50,000 and her basis for the building received is $120,000. b. Lily’s recognized gain is $50,000 and her basis for the building received is $170,000. c. Lily’s recognized gain is $0 and her basis for the building received is $120,000. d. Lily’s recognized gain is $0 and her basis for the building received is $170,000. e. None of the above is correct. ANSWER: c 55. Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct? a. If the warehouse was used in Latisha’s business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. b. If the warehouse was used in Latisha’s business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000. c. If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. d. Only b. and c. are correct. e. a., b., and c. are correct. ANSWER: d

56. Which of the following statements is correct? a. The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain. b. The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss. c. The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain. d. Only a. and b. e. a., b., and c. ANSWER: e 57. Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000

Chapter 15 - Property Transactions: Nontaxable Exchanges for another business use machine with a fair market value of $28,000 and $2,000 cash. What is Bud’s recognized gain or loss? a. $0 b. $2,000 c. $6,000 d. $8,000 e. None of the above ANSWER: b 58. Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss? a. $0 b. $20,000 c. ($20,000) d. ($25,000) e. None of the above ANSWER: a 59. Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds? a. $0, $30,000. b. $5,000, $33,000. c. $5,000, $30,000. d. $8,000, $33,000. e. None of the above. ANSWER: e 60. Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building? a. $0 and $350,000. b. $0 and $450,000. c. ($150,000) and $300,000. d. ($200,000) and $350,000. e. None of the above. ANSWER: b 61. Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land? a. $0 and $420,000. b. $100,000 and $420,000. c. $100,000 and $520,000.

Chapter 15 - Property Transactions: Nontaxable Exchanges d. $280,000 and $700,000. e. None of the above. ANSWER: c 62. If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received? a. Adjusted basis of like-kind property surrendered + gain recognized – fair market value of boot received. b. Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received. c. Fair market value of like-kind property received – postponed gain. d. Only a. and c. e. None of the above. ANSWER: d 63. In determining the basis of like-kind property received, postponed losses are: a. Added to the basis of the old property. b. Subtracted from the basis of the old property. c. Added to the fair market value of the like-kind property received. d. Subtracted from the fair market value of the like-kind property received. e. None of the above. ANSWER: c 64. Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (fair market value of $93,000) to be used in her business in a like-kind exchange. What is Molly’s recognized gain or loss? a. $0 b. $5,000 c. ($2,000) d. ($7,000) e. None of the above ANSWER: b 65. In October 2015, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2005 while Jerry purchased his in 2008. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben’s realized gain is $30,000. On what date does the holding period for Ben’s realty received from Jerry begin? When does the holding period for the stock he receives begin? a. 2005, 2015. b. 2005, 2005. c. 2008, 2008. d. 2008, 2015. e. None of the above. ANSWER: a 66. Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in

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