comprehensive volume--chapter 13--property …dec 06, 2013 · comprehensive volume--chapter...

COMPREHENSIVE VOLUME--CHAPTER 13--PROPERTY

TRANSACTIONS: DETERMINATION OF GAIN OR LOSS,

BASIS CONSIDERATIONS, AND NONTAXABLE

EXCHANGES--PART 1

Student: ___________________________________________________________________________

1. Realized gain or loss is measured by the difference between the amount realized from the sale or other

disposition of property and the property’s adjusted basis at the date of disposition.

True False

2. In computing the amount realized when the fair market value of the property received cannot be determined,

the fair market value of the property surrendered may be used.

True False

3. If Wal-Mart stock increases in value during the tax year by $6,000, the amount realized is a positive $6,000.

True False

4. If the buyer assumes the seller’s liability on the property acquired, the seller’s amount realized is decreased

by the amount of the liability assumed.

True False

5. The fair market value of property received in a sale or other disposition is the price at which property will

change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

True False

6. If a seller assumes the buyer’s liability on the property acquired, the buyer’s adjusted basis for the property is

increased by the amount of the liability assumed.

True False

7. Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the

determination of the property’s adjusted basis whereas capital expenditures are added to the original basis.

True False

8. Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to

the land. During the first year, Milton deducts cost recovery of $4,922. Milton’s adjusted basis for the building

at the end of the first year is $195,078 ($200,000 – $4,922).

True False

9. In a casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received

and by any resulting recognized loss.

True False

10. Monroe’s delivery truck is damaged in an accident. Monroe’s adjusted basis for the delivery truck prior to

the accident is $20,000. If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of

$1,000, his adjusted basis for the delivery truck after the accident is $21,000.

True False

11. If insurance proceeds are received for property used in a trade or business, a casualty transaction can result

in recognized gain, but cannot result in a recognized loss.

True False

12. If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the

return of capital concept does not apply and the shareholders’ adjusted basis for the stock remains unchanged.

True False

13. Reggie owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from

Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an

adjusted basis for his Amethyst stock of $0.

True False

14. The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the

shareholder-recipient’s basis in the stock investment is treated as a capital gain.

True False

15. The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is

made. The amount of the amortized premium is treated as an interest deduction.

True False

16. Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium. On

the later sale of the bond for $10,800, she has amortized $300 of the premium. Helen has a recognized gain of

$800 ($10,800 amount realized – $10,000 adjusted basis).

True False

17. The amount received for a utility easement on land is included in the gross income of the taxpayer.

True False

18. A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale,

exchange, or condemnation of a personal use asset is not recognized.

True False

19. A realized gain whose recognition is postponed results in the temporary recovery of more than the

taxpayer’s cost or other basis.

True False

20. A realized loss whose recognition is postponed results in the temporary recovery of more than the

taxpayer’s cost or other basis.

True False

21. Wade is a salesman for a real estate development company. Because he is the “salesperson of the year,” he

is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and

the developer’s adjusted basis is $100,000. Wade must recognize a gain of $10,000 ($100,000 developer’s

adjusted basis – $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000

recognized gain).

True False

22. When a taxpayer has purchased several lots of stock on different dates at different purchase prices and

cannot identify the lot of stock that is being sold, he should use either a weighted average approach or a LIFO

approach.

True False

23. Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of

the individual assets acquired.

True False

24. Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method

associated with the purchase of a business.

True False

25. The holding period for nontaxable stock dividends that are the same type (i.e., common on common)

includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are

not the same type (i.e., preferred on common) is new and begins on the date the dividend is received.

True False

26. For nontaxable stock rights where the fair market value of the rights is 15% or more of the fair market value

of the stock, the taxpayer is required to allocate a portion of the stock basis to the stock rights.

True False

27. The carryover basis to a donee for property received by gift can be an amount greater than the donor’s

adjusted basis.

True False

28. This year, Fran receives a birthday gift of stock worth $75,000 from her aunt. The aunt has owned the stock

(adjusted basis $50,000) for 10 years and pays gift tax of $27,000 on the transfer. Fran’s basis in the stock is

$75,000—the lesser of $77,000 ($50,000 + $27,000) or $75,000.

True False

29. The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the

gift the adjusted basis of the property exceeds the property’s fair market value.

True False

30. The basis for depreciation on depreciable gift property received is the donor’s adjusted basis of the property

at the date of the gift (assuming no gift taxes are paid). The rule applies regardless of whether the fair market

value at the date of the gift is greater than or less than the donor’s adjusted basis.

True False

31. The holding period for property acquired by gift is automatically long term.

True False

32. The basis of inherited property usually is its fair market value on the date of the decedent’s death.

True False

33. If the fair market value of the property on the date of death is greater than on the alternate valuation date, the

use of the alternate valuation amount is mandatory.

True False

34. If the alternate valuation date is elected by the executor in 2013, the total basis of inherited property will be

more than what it would have been if the primary valuation date and amount had been used.

True False

35. If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included

in the decedent’s estate becomes the fair market value 6 months after the decedent’s death.

True False

36. If a husband inherits his deceased wife’s share of jointly owned property in a common law state, both the

husband’s original share and the share inherited from the deceased wife are stepped-up or down to the fair

market value at the date of the wife’s death.

True False

37. Parker bought a brand new Ferrari on January 1, 2013, for $125,000. Parker was fatally injured in an auto

accident on June 23, 2013, when the fair market value of the car was $105,000. Parker was driving a loaner car

from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best

friend, Ryan. Ryan’s holding period for the Ferrari begins on January 1, 2013.

True False

38. Transactions between related parties that result in disallowed losses might later provide a tax benefit to the

related party buyer.

True False

39. For the loss disallowance provision under § 267, related parties include certain family members, a

shareholder and his or her controlled corporation (i.e., greater than 50% in value of the corporation’s

outstanding stock), and a partner and his or her controlled partnership (i.e., greater than 50% of the capital

interests or profits interest in the partnership).

True False

40. If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding

period of the seller.

True False

41. Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000. Ray gives

the stock to his daughter, Trish, who subsequently sells it for $26,000. Ben’s recognized loss is $0 and Trish’s

recognized gain is $1,000 ($26,000 – $15,000 – $10,000).

True False

42. The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

True False

43. Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after

the sale or exchange, the taxpayer acquires substantially identical stock.

True False

44. Gene purchased an SUV for $45,000 which he uses 100% for personal purposes. When the SUV is worth

$30,000, he contributes it to his business. The gain basis is $45,000, the loss basis is $30,000, and the basis for

cost recovery is $45,000.

True False

45. If property that has been converted from personal use to business use has appreciated in value, its basis for

gain will be the same as the basis for loss.

True False

46. The basis for gain and loss of personal use property converted to business use is the lower of the adjusted

basis or the fair market value on the date of conversion.

True False

47. Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is

going to be given to Stuart’s nephew, Alex, it is preferable for the transfer to be by inheritance rather than by

gift.

True False

48. The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or

cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of

cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

True False

49. Broker’s commissions, legal fees, and points paid by the seller reduce the seller’s amount realized.

True False

50. Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the

end of the tax year.

True False

51. 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.

True False

52. 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.

True False

53. In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is permanent.

True False

54. 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.

True False

55. The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

True False

56. 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.

True False

57. Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for

over 24 months.

True False

58. 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.

True False

59. 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.

True False

60. 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 doesqualify for like-kind exchange treatment.

True False

61. 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.

True False

62. Pat owns a 1965 Mustang car 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

recognized gain is $0 and his adjusted basis for the convertible is $22,000.

True False

63. 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.

True False

64. 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.

True False

65. If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

True False

66. 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).

True False

67. 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.

True False

68. 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.

True False

69. 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).

True False

70. The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a

smaller amount.

True False

71. Terry exchanges real estate (acquired on August 25, 2007) held for investment for other real estate to be

held for investment on September 1, 2013. 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, 2007.

True False

72. 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.

True False

73. 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.

True False

74. 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.

True False

75. Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

True False

76. 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.

True False

77. 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.

True False

78. 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).

True False

79. Sidney, a calendar year taxpayer, owns a building in Columbus, OH, in which he conducts his retail

computer sales business. The building is destroyed by fire on December 12, 2013, 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, 2014. 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).

True False

80. Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a

tornado in October 2013. He receives insurance proceeds of $250,000 in January 2014. If before 2017, Dennis

replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the

recognition of any realized gain.

True False

81. 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.

True False

82. The holding period of replacement property where the election to postpone gain is made includes the

holding period of the involuntarily converted property.

True False

83. 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.

True False

84. 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).

True False

85. Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the

same tax treatment.

True False

86. 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).

True False

87. 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 or excluded as a § 121 sale of

a principal residence.

True False

88. The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.

True False

89. At a particular point in time, a taxpayer can have two principal residences for § 121 exclusion purposes.

True False

90. 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.

True False

91. 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.

True False

92. Wyatt sells his principal residence in December 2013 and qualifies for the § 121 exclusion. He sells another

principal residence in November 2014. Under no circumstance can Wyatt qualify for the § 121 exclusion on the

sale of the second residence.

True False

93. Taxpayer owns a home in Atlanta. His company transfers him to Chicago on January 2, 2013, and he sells

the Atlanta house in early February. He purchases a residence in Chicago on February 3, 2013. On December

15, 2013, taxpayer’s company transfers him to Los Angeles. In January 2014, he 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.

True False

94. 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.

True False

95. 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.

True False

96. Alex used the § 121 exclusion three months prior to his marriage to June. If June sells her principal

residence four months after their marriage, she cannot use the § 121 exclusion.

True False

97. Kitty, 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.

True False

98. 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.

True False

99. 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.

True False

100. 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.

True False

101. Albert purchased a tract of land for $140,000 in 2010 when he heard that a new highway was going to be

constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed

the property and indicated that he would probably get $180,000. The highway project was abandoned in 2013

and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2013?

A. $40,000.

B. $60,000.

C. $80,000.

D. $100,000.

E. None of the above.

102. Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the

year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and

$3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the

sale of her property?

A. $277,000.

B. $282,000.

C. $287,000.

D. $300,000.


103. Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes

are $9,000 per calendar year and are payable on December 31. On April 1, 2013, Alice sells her land subject to

the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000.

What is the amount realized?

A. $1,370,000.

B. $1,372,219.

C. $1,720,000.

D. $1,722,219.


104. Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional

$25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an

adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine

subject to the two liabilities for $45,000. What is his realized gain or loss?

A. $0.

B. $45,000.

C. $163,000.

D. $208,000.


105. The bank forecloses on Lisa’s apartment complex. The property had been pledged as security on a

nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the

property is $480,000, and the fair market value is $750,000. What is Lisa’s recognized gain or loss?

A. $270,000.

B. ($750,000).

C. $0.

D. ($480,000).


106. Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker’s commission of $28,000

associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned

from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000.

What is Carlton’s basis for the land and the improvements?

A. $1,350,000.

B. $1,378,000.

C. $1,385,000.

D. $1,413,000.


107. Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation

associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the

house on July 1, 2013. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor,

she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her

mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2013. What is

Jamie’s adjusted basis at the date of the sale and the amount realized?

A. $370,000 adjusted basis; $661,400 amount realized.

B. $370,000 adjusted basis; $661,100 amount realized.

C. $370,000 adjusted basis; $665,200 amount realized.

D. $325,000 adjusted basis; $663,200 amount realized.

E. $325,000 adjusted basis; $694,000 amount realized.

108. Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She

builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in

commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the

sale of the house?

A. $0.

B. $38,000.

C. $70,000.

D. $110,000.


109. On February 2, 2013, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are

payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits

$374,575 to the seller at closing. Karin’s adjusted basis for the real estate is:

A. $374,575.

B. $375,000.

C. $375,425.

D. $379,575.


110. Capital recoveries include:

A. The cost of capital improvements.

B. Ordinary repair and maintenance expenditures.

C. Payments made on the principal of a mortgage on taxpayer’s building.

D. Amortization of bond premium.

E. All of the above.

111. Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting

practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1,

$3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve

sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed

to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in

the home?

A. $493,783.

B. $496,825.

C. $496,958.

D. $500,000.


112. Sandra’s automobile, which is used exclusively in her trade or business, was damaged in an accident. The

adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the

fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra’s

adjusted basis for the automobile after the casualty?

A. $0.

B. $7,000.

C. $7,800.

D. $10,200.


113. Joyce’s office building was destroyed in a fire (adjusted basis of $350,000; fair market value of

$400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional

inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000

because of a co-insurance clause in her insurance policy. What is Joyce’s recognized gain or loss?

A. $0.

B. $10,000 loss.

C. $10,000 gain.

D. $40,000 gain.


114. Elvis owns all of the stock of White Corporation. The accumulated earnings and profits of White

Corporation at the beginning of the year are a deficit of $20,000. The current earnings and profits are $30,000.

Elvis’ basis for his stock is $250,000. He receives a distribution of $300,000 on the last day of the tax year.

How much dividend income and/or capital gain should Elvis report?

A. $0.

B. Dividend income of $30,000 and capital gain of $20,000.

C. Dividend income of $30,000 and capital gain of $0.

D. Dividend income of $10,000 and capital gain of $20,000.


115. Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1,

2013, for $11,000. The maturity date is December 31, 2022. The annual interest rate is 8%. What is the amount

of taxable interest income that Karen should report for 2013, and the adjusted basis for the bonds at the end of

2013, assuming straight-line amortization is appropriate?

A. $0 and $11,000.

B. $0 and $10,900.

C. $100 and $11,000.

D. $100 and $10,900.


116. Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2013, for $11,000.

The bonds have an annual interest rate of 8% and a maturity date of December 31, 2022. If Jason elects to

amortize the bond premium, what is his taxable interest income for 2013 and the adjusted basis for the bonds at

the end of 2013 (assuming straight-line amortization is appropriate)?

A. $800 and $11,000.

B. $800 and $10,900.

C. $700 and $11,000.

D. $700 and $10,900.


117. A strip along the boundary of Joy’s land is condemned for a utility easement. She receives a payment of

$7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?

A. Joy must include the $7,500 in gross income.

B. Joy must reduce the basis of the land by $7,500.

C. Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.

D. Only a. and c. are correct.

E. a., b., and c. are correct.

118. Katie sells her personal use automobile for $12,000. She purchased the car three years ago for

$25,000. What is Katie’s recognized gain or loss?

A. $0.

B. $12,000.

C. ($13,000).

D. ($25,000).


119. Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original

cost). The car is worth $22,000. Which of the following statements is correct?

A. If Noelle sells the car for $22,000, her realized loss of $23,000 is not recognized.

B. If Noelle exchanges the car for another car worth $22,000, her realized loss of $23,000 is not recognized.

C. If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $23,000.

D. Only a. and b. are correct.


120. Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000.

What is Mary’s recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

A. $0.

B. $3,000.

C. $17,000.

D. $20,000.


121. Which of the following statements is false?

A. A realized gain that is never recognized results in the temporary recovery of more than the taxpayer’s cost or

other basis for tax purposes.

B. A realized gain on which recognition is postponed results in the temporary recovery of more than the

taxpayer’s cost or other basis for tax purposes.

C. A realized loss that is never recognized results in the permanent recovery of less than the taxpayer’s cost or

other basis for tax purposes.

D. A realized loss on which recognition is postponed results in the temporary recovery of less than the

taxpayer’s cost or other basis for tax purposes.


122. Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The

employer’s adjusted basis for the lot is $45,000, and its normal selling price is $90,000.

What is Nat’s recognized gain and his basis for the lot?

Recognized gain Basis

A. $0 $ 75,000

B. $0 $ 90,000

C. $15,000 $ 75,000

D. $15,000 $ 90,000

E. $30,000 $105,000

123. Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase

was in 1992 when he acquired 30 shares for $20 a share. In 1997, Alfred bought 150 shares at $10 a share. In

2012, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current

year (2013). If Alfred’s objective is to minimize gain, what is his recognized gain?

A. $1,250.

B. $3,520.

C. $5,950.

D. $6,250.


124. Mona purchased a business from Judah for $1,000,000. Judah’s records and an appraiser provided her

with the following information regarding the assets purchased:

Adjusted Basis FMV

Land $195,000 $270,000

Building 310,000 450,000

Equipment 95,000 180,000

What is Mona’s adjusted basis for the land, building, and equipment?

A. Land $270,000, building $450,000, equipment $180,000.

B. Land $195,000, building $575,000, equipment $230,000.

C. Land $195,000, building $310,000, equipment $95,000.

D. Land $270,000, building $521,429, equipment $208,571.


125. Nontaxable stock dividends result in:

A. A higher cost per share for all shares than before the stock dividend.

B. A lower cost per share for all shares than before the stock dividend.

C. An increase in the total cost of the old and new stock combined.

D. A decrease in the total cost of the old and new stock combined.


126. Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a

5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of

$12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized

upon receipt of the common stock dividend?

A. $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend

shares, $0 recognized gain.

B. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.

C. $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend

shares, $3,125 recognized gain.

D. $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.


127. Etta received nontaxable stock rights on October 3, 2013. She allocated $16,000 of the $50,000 basis for

the associated stock to the stock rights. The stock rights are exercised on November 8, 2013. The exercise price

for the stock is $52,000. What is Etta’s basis for the acquired stock?

A. $0.

B. $16,000.

C. $52,000.

D. $68,000.


128. Mike’s basis in his stock in Tan Corporation is $75,000. He receives nontaxable stock rights (fair market

value of $20,000) when the value of the stock is $100,000. What is the basis for the stock rights?

A. $0.

B. $12,500.

C. $15,000.

D. The basis is $0 unless the taxpayer elects to allocate a portion of the cost of the stock to the rights.


129. Which of the following statements is correct?

A. Under no circumstances does part of the stock basis have to be allocated to nontaxable stock rights.

B. If the fair market value of stock rights is equal to at least 15% of the fair market value of the stock, part of

the stock basis must be allocated to nontaxable stock rights.

C. An election may be made to allocate part of the stock basis to nontaxable stock rights only if the fair market

value of the nontaxable stock rights is at least 15% of the fair market value of the stock.

D. Only b. and c. are correct.

E. Only a. and c. are correct.

130. In 2009, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too

busy to work on the car and he gives it to his daughter Julia in 2013. At this time, the fair market value of the

car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration

herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia’s recognized gain or

loss on the sale of the car?

A. $0.

B. $13,000.

C. $15,000.

D. $18,000.


131. Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax

results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

A. $0.

B. $2,000.

C. $4,000.

D. $10,000.


132. Gift property (disregarding any adjustment for gift tax paid by the donor):

A. Has no basis to the donee because he or she did not pay anything for the property.

B. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a gain.

C. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a loss,

and the fair market value on the date of gift was less than the donor’s adjusted basis.

D. Has no basis to the donee if the fair market value on the date of gift is less than the donor’s adjusted basis.


133. Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and

fair market value of $35,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle

subsequently sold the property for $31,000. What is the recognized gain or loss?

A. $0.

B. ($4,000).

C. ($10,000).

D. ($18,000).


134. Rob was given a residence in 2013. At the time of the gift, the residence had a fair market value of

$201,000, and its adjusted basis to the donor was $141,000. The donor paid a gift tax of $10,000 on the taxable

gift of $187,000. What is Rob’s basis for gain?

A. $140,000.

B. $144,200.

C. $150,000.

D. $200,000.


135. In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in

1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the

transaction in 1976, what is Jeri’s gain basis for the stock?

A. $7,500.

B. $8,350.

C. $9,017.

D. $20,000.


136. Noelle received dining room furniture as a gift from her friend, Jane. Jane’s adjusted basis was $9,200 and

the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold

it to a neighbor six months later for $6,500. What is her recognized gain or loss?

A. $0.

B. ($500).

C. ($2,700).

D. $6,500.


137. The holding period of property acquired by gift may begin on:

A. The date the property was acquired by the donor only.

B. The date of gift only.

C. Either the date the property was acquired by the donor or the date of gift.

D. The last day of the tax year in which the property was originally acquired by the donor.


138. Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in

Nancy’s hands of $80,000. No gift tax was paid. What is the niece’s basis for depreciation (cost recovery)?

A. $0.

B. $19,000.

C. $61,000.

D. $80,000.


139. Which of the following is correct?

A. The gain basis for property received by gift is the lesser of the donor’s adjusted basis or the fair market value

on the date of the gift.

B. The loss basis for property received by gift is the same as the donor’s basis.

C. The gain basis for inherited property is the same as the decedent’s basis.

D. The loss basis for inherited property is the lesser of the decedent’s basis or the fair market value on the date

of the decedent’s death.


140. Tobin inherited 100 acres of land on the death of his father in 2013. A Federal estate tax return was filed

and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally

acquired the land in 1970 for $19,000 and prior to his death had made permanent improvements of

$6,000. What is Tobin’s basis in the land?

A. $19,000.

B. $25,000.

C. $300,000.

D. $325,000.


141. Al owns stock with an adjusted basis of $100,000 and a fair market value of $300,000. He gives the stock

to Jane on July 1, 2012. When Jane dies, the fair market value of the stock is $900,000. Jane’s will provides that

Al is to receive the stock. Which of the following is false?

A. If Jane dies on June 1, 2013, Al’s basis for the stock is $100,000.

B. If Jane dies on August 1, 2013, Al’s basis for the stock is $900,000.

C. If Jane dies on June 15, 2013, Al’s basis is $300,000.

D. If Jane dies on July 1, 2013, Al’s basis is $100,000.

E. All of the above are true.

142. Emma gives 1,000 shares of Green, Inc. stock to her niece, Margaret. Emma’s adjusted basis for the stock

is $200,000 and the fair market value is $300,000. Seven months after the gift, Margaret is killed in an airplane

accident. Emma inherits the stock which then is worth $350,000. What is the adjusted basis of the inherited

stock to Emma?

A. $0.

B. $200,000.

C. $300,000.

D. $350,000.


143. Neal and his wife Faye reside in Texas, a community property state. Their community property consists of

real estate (adjusted basis of $800,000; fair market value of $6 million) and personal property (adjusted basis of

$390,000; fair market value of $295,000). Neal dies first and leaves his estate to Faye. What is Faye’s basis in

the property after Neal’s death?

A. $800,000 real estate and $295,000 personal property.

B. $800,000 real estate and $390,000 personal property.

C. $3,400,000 real estate and $295,000 personal property.

D. $6,000,000 real estate and $295,000 personal property.


144. Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as

joint tenants in 2009 for $300,000. In 2013, Diane dies and bequeaths her share of the land to Robert. The land

has a fair market value of $450,000. What is Robert’s adjusted basis for the land?

A. $300,000.

B. $375,000.

C. $450,000.

D. $750,000.


145. Taylor inherited 100 acres of land on the death of his father in 2013. A Federal estate tax return was filed

and this land was valued therein at $650,000, its fair market value at the date of the father’s death. The father

had originally acquired the land in 1967 for $112,000 and prior to his death he had expended $20,000 on

permanent improvements. Determine Taylor’s holding period for the land.

A. Will begin with the date his father acquired the property.

B. Will automatically be long-term.

C. Will begin with the date of his father’s death.

D. Will begin with the date the property is distributed to him.


146. Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on

August 4, 2013, the date of the decedent’s death. The executor distributes the land to Kelly on November 12,

2013, at which time the fair market value is $49,000. The fair market value on February 4, 2014, is $45,000. In

filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2014,

for $48,000. What is her recognized gain or loss?

A. ($1,000).

B. ($2,000).

C. ($47,000).

D. $1,000.


147. Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its

fair market value of $105,000. What is Arthur’s recognized gain or loss and Ned’s basis in the land?

A. $0 and $105,000.

B. $0 and $145,000.

C. ($40,000) and $105,000.

D. ($40,000) and $145,000.


148. Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently

sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an

unrelated party, for $50,000. What is Preston’s recognized gain or loss on the sale of the property to Hun?

A. $0.

B. $5,000.

C. $12,000.

D. ($5,000).


149. Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2010. In the current tax

year (2013), she sells 25 shares of the 100 shares purchased on January 1, 2010, for $2,500. Twenty-five days

earlier, she had purchased 30 shares for $3,000. What is Karen’s recognized gain or loss on the sale of the stock,

and what is her basis in the 30 shares purchased 25 days earlier?

A. $375 recognized loss, $3,000 basis in new stock.

B. $0 recognized loss, $3,000 basis in new stock.

C. $0 recognized loss, $3,375 basis in new stock.

D. $0 recognized loss, $3,450 basis in new stock.


150. Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2009. On January 1,

2013, he sells 125 shares for $5,000. On January 22, 2013, he purchases 135 shares of Eagle Corporation stock

for $6,075. When does Andrew’s holding period begin for the 135 shares?

A. January 22, 2013.

B. January 1, 2013.

C. March 31, 2009.

D. March 31, 2009, for 125 shares and January 22, 2013, for 10 shares.


151. The basis of personal use property converted to business use is:

A. Always the lower of its adjusted basis or fair market value on the date of conversion.

B. Always its adjusted basis on the date of conversion.

C. Always its fair market value on the date of conversion.

D. Always the higher of its adjusted basis or fair market value on the date of conversion.


152. Lynn purchases a house for $52,000. She converts the property to rental property when the fair market

value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for

$120,000. What is her recognized gain or loss?

A. $0.

B. $6,130.

C. $37,630.

D. $69,130.



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


C. In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more


D. All of the above.


154. 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.

155. 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.


156. 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 like-kind exchange treatment?

A. Mexico City, Mexico.

B. Toronto, Canada.

C. Paris, France.

D. Only a. and b.


157. Lily exchanges a building she uses in her rental business for a building owned by Kendall, her brother,

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.

158. 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.




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.

160. Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of

$30,000 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.


161. 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).


162. 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.


163. 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.


164. 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.

D. $280,000 and $700,000.


165. 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.


166. 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.


167. 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).


168. In October 2013, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his

real estate in 2003 while Jerry purchased his in 2006. 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. 2003, 2013.

B. 2003, 2003.

C. 2006, 2006.

D. 2006, 2013.


169. 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

Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena’s mortgage on the

land. What is the amount of Dena’s recognized gain or loss on the exchange?

A. $0.

B. $400,000.

C. $500,000.

D. $820,000.


170. On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a

mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and

subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of

gain should Paula recognize?

A. $0.

B. $25,000.

C. $125,000.

D. $175,000.


171. Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of

$280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by

Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market

value of $360,000. What is Tonya’s realized and recognized gain?

A. $310,000 realized and $310,000 recognized gain.

B. $310,000 realized and $0 recognized gain.

C. $110,000 realized and $110,000 recognized gain.

D. $110,000 realized and $0 recognized gain.


172. If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the

appropriate election, and the amount reinvested in replacement property is less than the amount realized,

realized gain is:

A. Recognized to the extent of the deficiency (amount realized not reinvested).

B. Recognized to the extent of realized gain.

C. Recognized to the extent of the amount reinvested in excess of the adjusted basis.

D. Permanently not subject to taxation.


173. Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an

involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?

A. Her farm tractor is hauled to the city dump because it is worn out.

B. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in

preparation for her retirement.

C. Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway.

She recovers condemnation proceeds of $175,000.

D. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due

to a reduction in milk prices.


174. Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000). Fifty acres of the land are

condemned by the state for $400,000 in order to build a municipal stadium. Since the fair market value of

Betty’s farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000

in severance damages. Betty does not use the $300,000 to restore the usefulness of the farm and all of the

$700,000 ($400,000 + $300,000) proceeds are invested in the stock market. What is her recognized gain or loss

associated with the receipt of the severance damages?

A. $0.

B. $100,000.

C. $300,000.

D. $340,000.


175. An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2013. On

January 11, 2014, the insurance company paid the owner $450,000. The fair market value of the building was

$500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the

loss. The owner reinvested $410,000 in a new office building on February 12, 2014, that was smaller than the

original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition

of gain from an involuntary conversion) is elected?

A. $0 and $320,000.

B. $0 and $410,000.

C. $40,000 and $320,000.

D. $130,000 and 410,000.


176. Which of the following statements is correct with respect to qualified replacement property in a § 1033

involuntary conversion?

A. If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building

to be used to sell inventory.

B. If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to

be used in the taxpayer’s business.

C. If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with

an office building to be used in the taxpayer’s business.

D. Only b. and c.

E. a., b., and c.

177. Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of

$800,000) that was destroyed by fire on December 24, 2013. If the insurance settlement was $950,000

(received March 1, 2014), what is the latest date that Jared can replace the office building in order to qualify for

§ 1033 nonrecognition of gain?

A. December 31, 2013.

B. August 31, 2014.

C. December 31, 2013.

D. August 31, 2016.


178. Which of the following statements is correct for a § 1033 involuntary conversion of an office building

which is destroyed by fire?

A. An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received

are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds

inflow is received that is large enough to produce a realized gain.

B. The postponement of realized gain in a § 1033 involuntary conversion is elective.

C. The functional use test is satisfied if a business warehouse is replaced with another business warehouse.

D. The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be

rented to tenants.

E. All of the above are correct.

179. Which of the following satisfy the time period requirement for postponement of gain as a § 1033

(nonrecognition of gain from an involuntary conversion) involuntary conversion?

A. Al’s business warehouse is destroyed by a tornado on October 31, 2013. Al is a calendar year taxpayer. He

receives insurance proceeds on December 5, 2013. He reinvests the proceeds in another warehouse to be used in

his business on December 29, 2013.

B. Heather’s personal residence is destroyed by fire on October 31, 2013. She is a calendar year taxpayer. She

receives insurance proceeds on December 5, 2013. She purchases another principal residence with the proceeds

on October 31, 2013.

C. Mack’s office building is condemned by the city as part of a road construction project. The date of the

condemnation is October 31, 2013. He is a calendar year taxpayer. He receives condemnation proceeds from the

city on that date. He purchases another office building with the proceeds on December 5, 2016.

D. Lizzy’s business automobile is destroyed in an accident on October 31, 2013. Lizzy is a fiscal year taxpayer

with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2013. She purchases

another business automobile with the proceeds on June 1, 2016.


180. Sam’s office building with an adjusted basis of $750,000 and a fair market value of $900,000 is

condemned on November 30, 2013. Sam is a calendar year taxpayer. He receives a condemnation award of

$875,000 on March 1, 2014. He builds a new office building at a cost of $845,000 which is completed and paid

for on December 31, 2016. What is Sam’s recognized gain on receipt of the condemnation award and basis for

the new office building assuming his objective is to minimize gain recognition?

A. $0; $720,000.

B. $30,000; $750,000.

C. $30,000; $845,000.

D. $150,000; $750,000.


181. A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building

was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A

factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is

the recognized gain or loss and what is the basis of the new factory building?

A. $0 and $450,000.

B. $0 and $460,000.

C. ($10,000) and $440,000.

D. ($10,000) and $450,000.


182. If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the

amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property

is:

A. The cost of the replacement property.

B. The fair market value of the involuntarily converted property minus the postponed gain.

C. The cost of the replacement property minus the postponed gain.

D. The amount realized.


183. Myrna’s personal residence (adjusted basis of $100,000) was condemned, and she received a

condemnation award of $80,000. Myrna used the condemnation proceeds to purchase a new residence for

$90,000. What is her recognized gain or loss and her basis in the new residence?

A. $0; $70,000.

B. $0; $90,000.

C. ($20,000); $90,000.

D. ($20,000); $70,000.


184. Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000)

for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived

in the Phoenix residence for 6 years. What is Fran’s recognized gain or loss on the sale of the Phoenix residence

and her basis for the residence in Atlanta?

A. $0 and $375,000.

B. $0 and $425,000.

C. ($50,000) and $325,000.

D. ($50,000) and $375,000.


185. Evelyn, a calendar year taxpayer, lists her principal residence with a realtor on February 7, 2013, enters

into a contract to sell on July 12, 2013, and sells (i.e., the closing date) the residence on August 1, 2013. The

realized gain on the sale is $225,000. Which date is the appropriate ending date in determining if the residence

has been owned and used by the Evelyn as the principal residence for at least two years during the prior

five-year period?

A. February 7, 2013.

B. July 12, 2013.

C. August 1, 2013.

D. December 31, 2013.


186. During 2013, Howard and Mabel, a married couple, decided to sell their residence. The residence has a

basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for

$395,000 with broker’s commissions and other selling expenses being $24,000. They purchased a new

residence in June for $400,000. What is the adjusted basis of the new residence?

A. $0.

B. $141,000.

C. $162,000.

D. $191,000.


187. During 2013, Ted and Judy, a married couple, decided to sell their residence, which had a basis of

$300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective

buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold

the house in May for $880,000. Broker’s commissions and other selling expenses amounted to $53,000. Since

they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from

the sale. What is the recognized gain?

A. $0.

B. $17,000.

C. $27,000.

D. $527,000.


188. During 2013, Zeke and Alice, a married couple, decided to sell their residence, which had a basis of

$200,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective

buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately. They sold the

house in May for $800,000. Broker’s commissions and other selling expenses amounted to $50,000. They

purchased a new residence in July for $400,000. What is the recognized gain and the adjusted basis of the new

residence?

A. $45,000 and $400,000.

B. $50,000 and $400,000.

C. $100,000 and $600,000.

D. $550,000 and $800,000.


189. Carl sells his principal residence, which has an adjusted basis of $150,000 for $200,000. He incurs selling

expenses of $20,000 and legal fees of $2,000. He had purchased another residence one month prior to the sale

for $380,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer

elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?

A. $0 and $380,000.

B. $0 and $408,000.

C. $28,000 and $352,000.

D. $28,000 and $380,000.


190. Ross lives in a house he received as a gift from his father. His father had lived in the house for 12 years.

The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was

$140,000. Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for

$125,000. He incurs selling expenses of $7,000. What is Ross’ recognized gain or loss and basis for the new

residence?

A. ($17,000); $125,000.

B. ($17,000); $142,000.

C. $3,000; $125,000.

D. $3,000; $128,000.


191. Paula inherits a home on July 1, 2013, that had a basis in the hands of the decedent at death of $290,000

and a fair market value of $500,000 at the date of the decedent’s death. She decides to sell her old principal

residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the

inherited home. On September 16, 2013, she sells the old residence for $600,000. Paula incurs selling expenses

of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the

inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2013. What is

her recognized gain on the sale of her old principal residence and her basis in the inherited home?

A. $0; $500,000.

B. $193,000; $600,000.

C. $443,000; $600,000.

D. $475,000; $600,000.


192. Weston sells his residence to Joanne on October 15, 2013. Indicate which of the following statements is

correctly associated with § 121 (exclusion of gain on sale of principal residence).

A. Selling expenses decrease the seller’s amount realized and increase the buyer’s adjusted basis.

B. Repair expenses of the seller decrease the seller’s amount realized and have no effect on the buyer’s adjusted

basis.

C. Capital expenditures made by the seller prior to the sale increase the seller’s adjusted basis and have no

effect on the buyer’s adjusted basis.

D. Only a. and c.

E. a., b., and c.

193. Eric and Faye, who are married, jointly own a house in which they have resided for the past 17 years. They

sell the house for $375,000 with realtor’s fees of $10,000. Their adjusted basis for the house is $80,000. Since

they are in their retirement years, they plan on moving around the country and renting. What is their recognized

gain on the sale of the residence if they use the § 121 exclusion (exclusion of gain on sale of principal

residence) and if they elect to forgo the § 121 exclusion?

With exclusion Elect to forgo

A. $0 $0

B. $35,000 $35,000

C. $0 $285,000

D. $35,000 $285,000

E. $285,000 $225,000

194. Lenny and Beverly have been married and living together in Lenny’s home for 6 years. He lived in the

home alone for 20 years prior to their marriage. They sell the home, which has an adjusted basis of $120,000,

for $700,000. Lenny and Beverly plan to use the § 121 exclusion (exclusion of gain on sale of principal

residence). In Beverly’s prior marriage to Dan, Dan sold his principal residence and used the § 121 exclusion.

Beverly and Dan filed joint returns during their seven years of marriage. They had lived in Dan’s house

throughout their marriage. Dan’s sale had occurred one year prior to the divorce. Lenny and Beverly purchase a

replacement residence for $650,000 one month after the sale. What is the recognized gain and basis for the new

home?

A. $0; $80,000.

B. $80,000; $150,000.

C. $80,000; $650,000.

D. $330,000; $650,000.


195. Which of the following is incorrect?

A. The deferral of realized gain on a § 1031 like-kind exchange is mandatory.

B. The deferral of realized gain on an indirect (into cash and then into qualified property) § 1033 involuntary

conversion is mandatory.

C. The taxpayer can elect to forgo the exclusion of realized gain on a § 121 sale of residence.

D. Both b. and c. are incorrect.

E. a., b., and c. are incorrect.

196. Which of the following types of exchanges of insurance contracts qualify for nonrecognition treatment

under § 1035?

A. Exchange of life insurance contracts.

B. Exchange of a life insurance contract for an endowment or annuity contract.

C. Exchange of an endowment contract for an annuity contract.

D. Only a. and b.

E. a., b., and c.

197. Which of the following types of transactions qualify for nonrecognition treatment?

A. Exchange by a shareholder of stock in Chevron for stock in Shell.

B. Investment of the proceeds from the sale of the stock of a publicly traded company in the common stock of a

specialized small business investment company (SSBIC) within 60 days of the sale.

C. Investment of proceeds from the sale of qualified small business stock in another qualified small business

stock within 60 days of the sale.

D. Only b. and c.

E. a., b., and c.

198. As part of the divorce agreement, Tyler transfers his ownership interest in their personal residence to Lupe.

The house had been jointly owned by Tyler and Lupe and the adjusted basis is $520,000. At the time of the

transfer to Lupe, the fair market value is $800,000. What is the recognized gain to Tyler, and what is Lupe’s

basis for the house?

A. $0 and $520,000.

B. $0 and $800,000.

C. $140,000 and $520,000.

D. $280,000 and $800,000.


199. Which of the following statements is correct with respect to § 1044 (rollover of publicly traded securities

gain into specialized small business investment companies)?

A. Section 1044 provides for permanent exclusion of gain.

B. To qualify under § 1044, the proceeds must be reinvested within one year of the sale.

C. The statutory ceilings on § 1044 treatment are the same for individual and corporate taxpayers.



200. Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment?

A. Taxpayer has unused NOL carryovers.

B. Taxpayer has unused general business credit carryovers.

C. Taxpayer has suspended or current passive activity losses.

D. Only a. and b. are correct.


201. Robert sold his ranch which was his principal residence during the current taxable year. At the date of the

sale, the ranch had an adjusted basis of $460,000 and was encumbered by a mortgage of $200,000. The buyer

paid him $500,000 in cash, agreed to take the title subject to the $200,000 mortgage, and agreed to pay him

$100,000 with interest at 6 percent one year from the date of sale. How much is Robert’s recognized gain on the

sale?

202. Ken is considering two options for selling land for which he has an adjusted basis of $100,000 and on

which there is a mortgage of $80,000. Under the first option, Ken will sell the land for $225,000 with a

stipulation in the sales contract that he liquidate the mortgage before the sale is complete. Under the second

option, Ken will sell the land for $145,000 and the buyer will assume the mortgage. Calculate Ken’s recognized

gain under both options.

203. Annette purchased stock on March 1, 2013, for $200,000. At December 31, 2013, it was worth $210,000.

She also purchased a bond on September 1, 2013, for $20,000. At year end, it was worth $15,000. Determine

Annette’s realized and recognized gain or loss.

204. Nigel purchased a blending machine for $125,000 for use in his business. As to the machine, he has

deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000. Calculate

Nigel’s adjusted basis for the machine.

205. Peggy uses a delivery van in her business. The adjusted basis is $39,000, and the fair market value is

$34,000. The delivery van is stolen and Peggy receives insurance proceeds of $34,000. Determine Peggy’s

realized and recognized gain or loss.

206. Jan purchases taxable bonds with a face value of $250,000 for $265,000. The annual interest paid on the

bonds is $10,000. Assume Jan elects to amortize the bond premium. The total premium amortization for the first

year is $1,600.

a. What is Jan’s interest income for the first year?

b. What is Jan’s interest deduction for the first year?

c. What is Jan’s adjusted basis for the bonds at the end of the first year?

207. Boyd acquired tax-exempt bonds for $430,000 in December 2013. The bonds, which mature in December

2018, have a maturity value of $400,000. Boyd does not make any elections regarding the amortization of the

bond premium. Determine the tax consequences to Boyd when he redeems the bonds in December 2018.

208. Marilyn owns 100% of the stock of Lilac, Inc., with an adjusted basis of $45,000. She receives a cash

distribution of $160,000 from Lilac when its earnings and profits are $90,000.

a. What is Marilyn’s dividend income?

b. What is Marilyn’s recognized gain or loss?

c. What is Marilyn’s adjusted basis for her stock after the distribution?

209. Hilary receives $10,000 for a 13-foot wide utility easement along one of the boundaries to her property.

The easement provides that no structure can be built on that portion of the property. Her adjusted basis for the

property is $200,000 and the easement covers 15% of the total acreage. Determine the effect of the $10,000

payment on Hilary’s gross income and her basis for the property.

210. Ollie owns a personal use car for which he originally paid $48,000. He trades the car in on a sports utility

vehicle (SUV) paying the automobile dealer cash of $30,000. If the negotiated price of the SUV is $49,000,

what is Ollie’s recognized gain or loss and his adjusted basis for the SUV?

211. Omar has the following stock transactions during 2013:

Date Number of Number Selling

Stock purchased shares sold of shares Basis price

Orange 1/2011 100 $1,000

Blue 6/2011 200 3,000

Yellow 4/2012 50 1,250

Blue 2/2013 150 1,800

Yellow 3/2013 175 5,250

Blue 7/2013 250 $3,500

Yellow 11/2013 200 7,200

a. What is Omar’s recognized gain or loss on the stock sales if his objective is to minimize the recognized gain and to maximize the

recognized loss?

b. What is Omar’s recognized gain or loss if he does not identify the shares sold?

212. Hubert purchases Fran’s jewelry store for $950,000. The identifiable assets of the business are as follows:

Basis FMV

Inventory $ 90,000 $ 97,000

Accounts receivable 55,000 50,000

Building 100,000 225,000

Land 280,000 300,000

Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete. How should Hubert allocate the $950,000 purchase price to the

assets?

213. Marge purchases the Kentwood Krackers, a AAA level baseball team, for $1.5 million. The appraised

values of the identified assets are as follows:

Prepaid season tickets $150,000

Stadium lease 400,000

Player contracts 500,000

Equipment 100,000

The Krackers have won the pennant for the past two years. Determine Marge’s adjusted basis for the assets of the Kentwood Krackers.

214. Melody’s adjusted basis for 10,000 shares of Cardinal, Inc. common stock is $1,000,000. During the year,

she receives a 5% stock dividend that is a nontaxable stock dividend.

a. What is the amount of Melody’s gross income?

b. What is Melody’s total basis for the stock?

c. What is Melody’s basis per share?

215. In 2013, Felix gives 10,000 shares of stock to his daughter, Monica. The stock was acquired in 2004 for

$200,000, and at the time of the gift, it had a fair market value of $600,000. Felix paid a gift tax of $240,000.

[Assume the gift tax exclusion has been used by Felix—see Chapter 1.]

a. Does the receipt of the stock result in gross income to Monica?

b. What is Monica’s basis in the stock?

216. On September 18, 2013, Jerry received land and a building from Ted as a gift. Ted had purchased the land

and building on March 5, 2010, and his adjusted basis and the fair market value at the date of the gift were as

follows:

Asset Adjusted Basis FMV

Land $150,000 $200,000

Building 90,000 100,000

Ted paid gift tax on the transfer to Jerry of $100,000.

a. Determine Jerry’s adjusted basis and holding period for the land and building.

b. Assume instead that the FMV of the land was $89,000 and the FMV of the building was $60,000. Determine Jerry’s adjusted basis and

holding period for the land and building.

217. Emma gives her personal use automobile (cost of $32,000; fair market value of $12,000) to her son, Louis,

on July 3, 2013. She has owned the automobile since July 1, 2010.

a. What is Louis’ basis for the car?

b. When does his holding period begin?

218. Faith inherits an undivided interest in a parcel of land from her father on February 15, 2013. Her father

purchased the land on August 25, 1986 and his basis for the land was $325,000. The fair market value of the

land is $12,500,000 on the date of her father’s death and is $11,000,000 six months later. The executor elects

the alternate valuation date. Faith has nine brothers and sisters and each inherited a one-tenth interest.

a. What is Faith’s adjusted basis for her one-tenth undivided interest in the land?

b. What is her holding period for the land?

219. Elbert gives stock worth $28,000 (no gift tax resulted) to his friend, Jeff, on June 8, 2013. Elbert purchased

the stock on September 1, 2006, and his adjusted basis is $22,000. Jeff dies on December 8, 2014, and

bequeaths the stock to Elbert. At that date, the fair market value of the stock is $31,000.

a. What is Jeff’s basis and holding period for the stock?

b. What is Elbert’s basis and holding period for the stock?

220. Ed and Cheryl have been married for 27 years. They own land jointly with a basis of $300,000. Ed dies in

2013, when the fair market value of the land is $500,000. Under the joint ownership arrangement, the land

passed to Cheryl.

a. If Ed and Cheryl reside in a community property state, what is Cheryl’s basis in the land?

b. If Ed and Cheryl reside in a common law state, what is Cheryl’s basis in the land?

221. On January 15 of the current taxable year, Merle sold stock with a cost of $40,000 to his brother Ned for

$25,000, its fair market value. On June 21, Ned sold the stock to a friend for $26,000.

a. What are the tax consequences to Merle and Ned?

b. Would Ned recognize any gain if he sold the stock for $41,000?

222. Monica sells a parcel of land to her son, Elbert, for $90,000. Monica’s adjusted basis is $100,000. Three

years later, Elbert gives the land to his fiancée, Karen. At that date, the land is worth $104,000. No gift tax is

paid. Since Elbert is going to be stationed in the U.S. Army in Germany for 3 years, they do not plan on being

married until his tour is completed. Six months after receiving the land, Karen sells it for $110,000. At the same

time, Karen sends Elbert a “Dear John” email. Calculate Karen’s realized and recognized gain or loss.

223. Mitch owns 1,000 shares of Oriole Corporation common stock (adjusted basis of $15,000). On April 27,

2013, he sells 400 shares for $5,200, while on May 5, 2013, he purchases 200 shares for $3,600.

a. What is Mitch’s recognized gain or loss resulting from these transactions?

b. What is Mitch’s basis for the stock acquired on May 5, 2013?

c. Could Mitch have obtained different tax consequences in a. and b. if he had sold the 400 shares on December 27, 2013, and purchased the

200 shares on January 5, 2014?

224. Marsha transfers her personal use automobile to her business (a sole proprietorship). The car’s adjusted

basis is $30,000 and the fair market value is $16,000. No cost recovery had been deducted by Marsha, since she

held the car for personal use. Determine the adjusted basis of the car to Marsha’s sole proprietorship including

the basis for cost recovery.

225. Jacob owns land with an adjusted basis of $140,000 and a fair market value of $115,000. Determine the

amount of realized and recognized gain or loss to the seller and the adjusted basis for the buyer for each of the

following.

a. Jacob sells the land for $115,000 to a corporation in which he owns 60% of the stock.

b. Jacob sells the land for $115,000 to a partnership in which he has a capital and profits interest of 60%.

226. For the following exchanges, indicate which qualify as like-kind property.

a. Inventory of a sporting goods store in Charleston for inventory of an appliance store in Savannah.

b. Inventory of a ladies dress shop in Cleveland for inventory of a ladies dress shop in Richmond.

c. Investment land in Virginia Beach for office building in Williamsburg.

d. Used automobile used in a business for a new automobile to be used in the business.

e. Investment land in Paris for investment land in San Francisco.

f. Shares of Texaco stock for shares of Exxon Mobil stock.

227. Chaney exchanges a truck used in her business for making deliveries for a smaller more fuel-efficient truck

to be used in her business for making deliveries. The adjusted basis for her truck is $32,000. The smaller truck

has a fair market value of $33,000. In addition, Chaney receives cash of $4,000.

a. Calculate Chaney’s realized and recognized gain or loss.

b. Calculate Chaney’s basis for the assets she received.

228. Sammy exchanges equipment used in his business in a like-kind exchange. The property exchanged is as

follows:

Property Surrendered Property Received

Adj. Basis FMV Adj. Basis FMV

Equipment $44,000 $60,000 $50,000 $43,000

Cash $ 5,000 $ 5,000

Liability on equipment $12,000 $12,000

The other party assumes the liability.

a. What is Sammy’s recognized gain or loss?

b. What is Sammy’s basis for the assets he received?

229. Jake exchanges an airplane used in his business for a smaller airplane to be used in his business. His

adjusted basis for the airplane is $325,000 and the fair market value is $310,000. The fair market value of the

smaller airplane is $300,000. In addition, Jake receives cash of $10,000.

a. Calculate Jake’s realized and recognized gain or loss and his adjusted basis for the assets received.

b. Assume that the exchange is between Jake and Jake’s son. Calculate Jake’s realized and recognized gain or loss and his adjusted basis for

the assets received if his son’s intention is to use the airplane in his trade or business.

230. a. Orange Corporation exchanges a warehouse located in Michigan (adjusted basis of $560,000) for a

warehouse located in Ohio (adjusted basis of $450,000; fair market value of $525,000). Indicate the amount of

gain or loss that is recognized by Orange Corporation on the exchange, and the basis of the warehouse acquired.

b. Assume that in addition to the warehouse Orange Corporation also received $100,000 in cash. Indicate the amount of gain or loss that is

recognized by Orange Corporation on the exchange, and the basis of the warehouse acquired.

c. How would your answer in b. change if instead of receiving $100,000 in cash, the other party assumed Orange’s $100,000 mortgage on the

Michigan warehouse?

231. Eunice Jean exchanges land held for investment located in Rolla, Missouri, for land to be held for

investment located near Madrid, Spain. Her basis for the land given up is $450,000 and the fair market value of

the land received is $500,000. Eunice Jean also receives cash of $45,000.

a. What is Eunice Jean’s recognized gain?

b. What is her basis for the land received?

232. For each of the following involuntary conversions, determine if the property qualifies as replacement

property.

a. Chuck’s restaurant building is destroyed by fire. He clears the site and builds another restaurant building.

b. Diane’s warehouse which she used for storing inventory is destroyed by a tornado. She purchases another warehouse in which she will

store inventory.

c. Part of Andrew’s dairy farm land is condemned to make way for an interstate highway. He uses the condemnation proceeds to construct a

barn to be used for storing cattle feed.

d. Liz owns a shopping mall which is destroyed by a flood. Since the tenant occupancy rate was down, she uses the insurance proceeds to

purchase an office building which she will rent to tenants.

e. Eleanor’s Maserati Gran Turismo is stolen. The original cost was $125,000, and she had used it exclusively for personal use. Due to the

limited supply of this model, it had appreciated in value. Eleanor received insurance proceeds of $130,000 and uses the proceeds to

purchase a replacement Gran Turismo.

233. Samuel’s hotel is condemned by the City Housing Authority on July 5, 2013, for which he is paid

condemnation proceeds of $950,000. He first received official notification of the pending condemnation on May

2, 2013. Samuel’s adjusted basis for the hotel is $600,000 and he uses a fiscal year for tax purposes with a

September 30 tax year-end.

a. How much must Samuel reinvest in qualifying replacement property in order to postpone the recognition of realized gain?

b. If Samuel reinvests the minimum amount required to avoid recognition of realized gain, what is his basis for the replacement property?

c. What is qualifying replacement property?

d. What is the earliest date that Samuel can acquire qualifying replacement property?

e. What is the latest date that Samuel can acquire qualifying replacement property?

f. How would the answer in e. change if Samuel’s hotel had been destroyed in a flood?

234. Lucinda, a calendar year taxpayer, owned a rental property with an adjusted basis of $312,000 in a major

coastal city. Her property was condemned by the city government on October 12, 2013. In order to build a

convention center, Lucinda eventually received qualified replacement property from the city government on

March 9, 2014. This new property has a fair market value of $410,000.

a. What is Lucinda’s recognized gain or loss on the condemnation?

b. What is her adjusted basis for the new property?

c. If, instead of receiving qualifying replacement property, Lucinda was paid $410,000, what is the latest date that she can acquire qualifying

replacement property?

235. Patty’s factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2013.

Insurance proceeds of $500,000 are received on June 1, 2013. She has a new factory building constructed for

$490,000, which she occupies on October 1, 2013. Assuming Patty’s objective is to minimize the tax liability,

calculate her recognized gain or loss and the basis of the new factory building.

236. Evelyn’s office building is destroyed by fire on July 12, 2013. The adjusted basis is $315,000. She receives

insurance proceeds of $350,000 on August 31, 2013. Calculate the amount that Evelyn must reinvest in

qualifying property in order that her recognized gain be $20,000. Assume she elects § 1033 (nonrecognition of

gain from an involuntary conversion) postponement treatment.

237. Carlos, who is single, sells his personal residence on November 5, 2013, for $400,000. His adjusted basis

was $125,000. He pays realtor’s commissions of $20,000. He owned and occupied the residence for 12 years.

Having decided that he no longer wants the burdens of home ownership, he invests the sales proceeds in a

mutual fund and enters into a 1-year lease on an apartment. The detriments of renting, including a crying child

next door, cause Carlos to rethink his decision. Therefore, he purchases another residence on November 6,

2014, for $275,000. Is Carlos eligible for exclusion of gain treatment under § 121 (exclusion of gain on sale of

principal residence)? Calculate Carlos’s recognized gain and his basis for the new residence.

238. On January 5, 2013, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.

He has owned and occupied the residence for 15 years. He pays $35,000 in commissions and $2,000 in legal

fees in connection with the sale. One month before the sale, Waldo painted the exterior of the house at a cost of

$5,000 and repaired various items at a cost of $3,000. On October 15, 2013, Waldo purchases a new home for

$600,000. On November 15, 2014, he pays $25,000 for completion of a new room on the house, and on January

14, 2015, he pays $15,000 for the construction of a pool. What is the Waldo’s recognized gain on the sale of his

old principal residence and what is the basis for the new residence?

239. Katrina, age 58, rented (as a tenant) the house that was her principal residence from January 1, 2013

through December 31, 2014. She purchased the house on January 1, 2015, for $150,000 and continued to

occupy it through June 30, 2016. She leased it to a tenant from July 1, 2016, through December 31, 2017. On

January 1, 2018, she sells the house for $350,000. She incurs a realtor’s commission of $20,000. Calculate her

recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire

another residence.

240. Use the following data to determine the sales price of Etta’s principal residence and the realized gain. She

is not married. The sale of the old residence qualifies for the § 121 exclusion.

Selling expenses $ 45,000

Recognized gain 180,000

Cost of new residence 760,000

Adjusted basis of old residence 225,000

§ 121 exclusion 250,000

241. Liz, age 55, sells her principal residence for $600,000. She purchased it twenty-two years ago for

$175,000. Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell

are $15,000. Liz’s objective is to minimize the taxes she must pay associated with the sale. Calculate her

recognized gain.

242. Mandy and Greta form Tan, Inc., by transferring the following assets to the corporation in exchange for

5,000 shares of stock each.

Mandy: Cash of $450,000

Greta: Land (worth $450,000; adjusted basis of $90,000).

How much gain must Tan recognize on the receipt of these assets?

243. Beth sells investment land (adjusted basis of $225,000) that she has owned for 6 years to her husband,

Richard, for its fair market value of $195,000.

a. Calculate Beth’s recognized gain or loss.

b. Calculate Richard’s basis for the land.

c. How would your answers in a. and b. change if Beth and Richard were not married (i.e., merely good friends)?

d. Would the answer in a. and b. change if the selling price was $270,000?

244. After 5 years of marriage, Dave and Janet decided to get a divorce. As part of the divorce settlement, Janet

transfers to Dave the house she purchased prior to their marriage. Janet’s adjusted basis for the house is

$230,000 and the fair market value is $410,000 on the date of the transfer. What are the tax consequences to

Janet and to Dave as a result of the transfer?

245. Walter owns stock in Target, Inc. (adjusted basis of $50,000) which he sells for $70,000 on March 21,

2013. On May 1, 2013, he uses the $70,000 to acquire stock in Lime, Inc., a specialized small business

investment company. Calculate Walter’s recognized gain on the sale of the Target stock and his basis in the

stock acquired.

COMPREHENSIVE VOLUME--CHAPTER 13--PROPERTY

TRANSACTIONS: DETERMINATION OF GAIN OR LOSS,

BASIS CONSIDERATIONS, AND NONTAXABLE

EXCHANGES--PART 1 Key

1. TRUE

2. TRUE

3. FALSE

4. FALSE

5. TRUE

6. FALSE

7. TRUE

8. TRUE

9. TRUE

10. FALSE

11. FALSE

12. TRUE

13. FALSE

14. TRUE

15. TRUE

16. FALSE

17. FALSE

18. TRUE

19. TRUE

20. FALSE

21. FALSE

22. FALSE

23. TRUE

24. TRUE

25. FALSE

26. TRUE

27. TRUE

28. FALSE

29. TRUE

30. TRUE

31. FALSE

32. TRUE

33. FALSE

34. FALSE

35. FALSE

36. FALSE

37. FALSE

38. TRUE

39. TRUE

40. FALSE

41. FALSE

42. TRUE

43. TRUE

44. FALSE

45. TRUE

46. FALSE

47. TRUE

48. TRUE

49. TRUE

50. TRUE

51. FALSE

52. FALSE

53. TRUE

54. FALSE

55. FALSE

56. FALSE

57. FALSE

58. FALSE

59. FALSE

60. TRUE

61. TRUE

62. FALSE

63. FALSE

64. FALSE

65. TRUE

66. FALSE

67. FALSE

68. TRUE

69. FALSE

70. FALSE

71. TRUE

72. FALSE

73. FALSE

74. TRUE

75. FALSE

76. TRUE

77. FALSE

78. FALSE

79. TRUE

80. TRUE

81. TRUE

82. TRUE

83. TRUE

84. FALSE

85. FALSE

86. FALSE

87. TRUE

88. FALSE

89. FALSE

90. FALSE

91. FALSE

92. FALSE

93. FALSE

94. TRUE

95. TRUE

96. FALSE

97. TRUE

98. TRUE

99. TRUE

100. FALSE

101. E

102. C

103. D

104. D

105. A

106. D

107. B

108. B

109. B

110. D

111. A

112. B

113. C

114. B

115. B

116. D

117. B

118. A

119. E

120. B

121. A

122. D

123. A

124. A

125. B

126. B

127. D

128. B

129. B

130. B

131. B

132. B

133. B

134. B

135. B

136. A

137. C

138. D

139. E

140. C

141. C

142. B

143. D

144. B

145. B

146. A

147. A

148. C

149. C

150. D

151. E

152. D

153. C

154. B

155. D

156. E

157. C

158. D

159. E

160. B

161. A

162. E

163. B

164. C

165. D

166. C

167. B

168. A

169. B

170. A

171. C

172. A

173. C

174. A

175. C

176. C

177. D

178. E

179. E

180. B

181. D

182. C

183. B

184. A

185. C

186. E

187. C

188. B

189. D

190. E

191. B

192. C

193. C

194. C

195. B

196. E

197. D

198. A

199. E

200. E

201. Amount realized:

Cash $500,000

Mortgage (property taken subject to) 200,000

Note receivable 100,000

$800,000

Adjusted basis (460,000)

Realized and recognized gain $340,000

202.

Option 1 Option 2

Amount realized $225,000 $225,000

Less: Adjusted basis (100,000) (100,000)

Recognized gain $125,000 $125,000

Since the liability assumption is included in the calculation of Ken’s amount realized, the recognized gain is $125,000, the same as for the cash sale.

203. Annette’s realized gain or loss is zero and her recognized gain or loss is zero. Since a sale or other disposition has not occurred, there is no

realization or recognition on either the stock or the bond.

204. Nigel’s adjusted basis for the machine is calculated as follows:

Cost $125,000

Less: Cost recovery (31,024)

Adjusted basis $ 93,976

Neither the maintenance cost of $5,200 nor the repair cost of $4,000 are capital expenditures. These costs are deducted in the tax year incurred.

205.

Amount realized $34,000


Realized loss ($ 5,000)

Recognized loss ($ 5,000)

Since the proceeds received from the insurance company are less than the adjusted basis, the realized loss of $5,000 is recognized.

206.

a. Jan receives interest payments of $10,000 each year. This amount is included in her gross income because the bonds are taxable.

b. Jan deducts the premium amortization of $1,600 for the first year because the bonds are taxable.

c. Jan’s adjusted basis for the bonds at the end of the first year is $263,400 ($265,000 cost – $1,600 premium amortization).

207. When Boyd redeems the bonds in 2018, he has no realized or recognized gain or loss.


Adjusted basis for bonds (400,000)

Realized gain $ –0–

Recognized gain $ –0–

Amortization of the premium on tax-exempt bonds is mandatory. Thus, the adjusted basis of the bonds at the maturity date is $400,000 ($430,000

cost – $30,000 premium amortized). Since the bonds are tax-exempt, the amount of interest income included in Boyd’s gross income (i.e., $0) is not

affected by the amortization of the bond premium.

208. a. and b. The $160,000 distribution is accounted for as follows:

Dividend income (Lilac’s earnings and profits) $ 90,000

Return of capital (Marilyn’s basis in the stock) 45,000

Capital gain (presuming the stock is a capital asset) 25,000

Total distribution $160,000

c. Marilyn’s adjusted basis for her stock is $0.

209. Hilary does not report the $10,000 payment in her gross income. Instead, she reduces the basis for the property by the $10,000 payment from

$200,000 to $190,000.

210. Ollie’s realized loss on the trade of his personal use car is calculated as follows:

Amount realized (trade-in value) $19,000


Realized loss ($29,000)

Since the car was a personal use asset, none of the realized loss of $29,000 is recognized. Ollie’s adjusted basis for the SUV is his cost of $49,000.

211.

a. Since Omar’s objective is to minimize recognized gain and maximize recognized loss, he will identify the specific shares (i.e., specific

identification method) being sold. He will select high basis shares to achieve his objective.

Sale of Blue stock

Amo

unt

realiz

ed

$

3,

5

0

0

Basis

:

200 shares from 6/2011 lot ($15 per share) $3,0

00

50 shares from 2/2013 lot ($12 per share)

600

(

3,

6

0

0

)

Reali

zed

loss

(

$

1

0

0

)

Reco

gnize

d loss

(

$

1

0

0

)

Sale of Yellow stock

Amo

unt

realiz

ed

$

7,

2

0

0

Basis

:


50


625

(

5,

8

7

5

)

Reali

zed

gain

$

1,

3

2

5

Reco

gnize

d

gain

$

1,

3

2

5

b. Since Omar does not identify the shares sold, he is required to use the FIFO method.

Sale of Blue stock

Amo

unt

realiz

ed

$

3,

5

0

0

Basis

:


00


600

(

3,

6

0

0

)

Reali

zed

loss

(

$

1

0

0

)

Reco

gnize

d loss

(

$

1

0

0

)

Sale of Yellow stock

Amo

unt

realiz

ed

$7,200

Basis

:


150 shares from 3/2013 lot ($30 per share) 4,500 (5,750)

Reali

zed

gain

$1,450

Reco

gnize

d

gain

$1,450

212. The purchase price is allocated to the assets as follows:

Inventory $ 97,000

Accounts receivable 50,000

Building 225,000

Land 300,000

Covenant 110,000

Goodwill 168,000

$950,000

Under the residual method, $168,000 ($950,000 – $782,000) is assigned to goodwill.

213. The portion of the purchase price of $1.5 million assigned to the identified assets is as follows:

Prepaid season tickets $ 150,000

Stadium lease 400,000

Player contracts 500,000

Equipment 100,000

$1,150,000

The residual value of $350,000 ($1,500,000 – $1,150,000) is assigned to goodwill.

214.

a. Melody has no gross income because the dividend is a nontaxable stock dividend.

b. Melody’s total stock basis remains at $1,000,000.

c. The basis per share decreases to $95.24 per share ($1,000,000/10,500 shares).

215.

a. The receipt of the gift does not result in gross income to Monica.

b. Monica’s basis in the stock is calculated as follows:

*Fraction rounded to 68%.

**The $586,000 is equal to the fair market value of the stock of $600,000 reduced by the per donee annual exclusion of $14,000.

216.

a. Jerry’s total basis for the assets received from Ted is:

$150,000 + $90,000 +[($60,000/$286,000*) ´ $96,000] = $261,000

The basis is allocated to the land and building as follows:

Land: ($200,000/$300,000) ´ $261,000 = $174,000

Building: ($100,000/$300,000) ´ $261,000 = $87,000

Jerry’s holding period begins on March 5, 2010.

*The $286,000 is equal to the fair market value of the land and building of $300,000 reduced by the per donee annual exclusion of $14,000. The

fraction was rounded to 21%.

b. Because the land and building have declined in value, none of the gift tax paid by Ted is considered in calculating Jerry’s adjusted

basis. Jerry’s basis for gain is:

Land $150,000

Building 90,000

Jerry’s basis for loss (the lower of Ted’s adjusted basis or the FMV at the date of the gift) is:

Land $89,000

Building 60,000

Jerry’s holding period begins on March 5, 2010, for the gain basis and September 18, 2013, for the loss basis.

217.

a. Louis’ gain basis is $32,000 and his loss basis is $12,000.

b. Louis’ holding period for gain begins on July 1, 2010 and his holding period for loss begins on July 3, 2013.

218.

a. Faith’s adjusted basis is $1,100,000 ($11,000,000 X 10%), which is her share of the fair market value of the land on the alternate

valuation date.

b. Since the property is inherited, Faith’s holding period is automatically long term.

219.

a. Jeff has a carryover basis of $22,000 and a carryover holding period of September 1, 2006.

b. Elbert has a new basis of $31,000. Since Elbert inherited the stock, his holding period is automatically long term. Since the period

between the date of the gift (June 8, 2013) and the date of Jeff’s death (December 8, 2014) is more than one year, the deathbed gift

provision does not apply.

220.

a. Cheryl’s basis in the land is $500,000 ($250,000 + $250,000).

b. Cheryl’s basis in the land is $400,000 [($300,000 ´ 50%) + $250,000].

221.

a. Merle realizes a loss of $15,000 [i.e., $25,000 (amount realized) – $40,000 (adjusted basis)] which is disallowed because the stock

was sold to a related party. Ned realizes a gain of $1,000 [i.e., $26,000 (amount realized) – $25,000 (adjusted basis)] on the sale to a

friend, but does not recognize any gain. Ned’s gain of $1,000 is less than Merle’s previously disallowed loss of $15,000.

b. Ned would realize a gain of $16,000 [i.e., $41,000 (amount realized) – $25,000 (adjusted basis)]. Gain of $1,000 would be

recognized [i.e., $16,000 (gain realized) – $15,000 (previously disallowed loss)].

222. Elbert’s adjusted basis for the land is his purchase price of $90,000. When Elbert gives the land to Karen, her adjusted basis is a carryover basis

of $90,000. Karen’s gain on the sale is calculated as follows:



Realized gain $ 20,000

Recognized gain $ 20,000

Monica’s disallowed loss of $10,000 ($90,000 amount realized – $100,000 adjusted basis) could have been used as an offset by Elbert if he had sold

the land at a realized gain. But, it cannot be used by Karen since she is not the original transferee (i.e., related-party buyer).

223.

a. To the extent of the substantially identical shares purchased during the 60-day period beginning 30 days before April 27 and ending 30

days after April 27, the transaction is a wash sale. The realized loss on the April 27 sale is $800 ($5,200 amount realized – $6,000

adjusted basis of 400 shares). Because Mitch acquired fewer shares than he sold, only a portion of the realized loss is disallowed. The

disallowed loss is $400 [(200 shares acquired/400 shares sold) ´ $800] and the recognized loss is $400 ($800 – $400).

b. Mitch’s adjusted basis for the stock acquired on May 5, 2013, is $4,000 ($3,600 purchase price + $400 disallowed loss).

c. The tax consequences would have been the same. Mitch has a wash sale to the extent of the 200 shares purchased. To avoid the

limitations of the wash sale, he should not purchase substantially identical stock within the 60-day window for a wash sale.

224. In this circumstance, the car is dual basis property. The adjusted basis to the sole proprietorship for gain is $30,000 and the adjusted basis for

loss is $16,000. The loss basis of $16,000 is used in calculating cost recovery.

225.

a. Jacob’s

realized

and

recognize

d loss is

calculated

as

follows.

Amount

realized

$115,000

Adjusted

basis

(140,000)

Realized

loss

($ 25,000)

Recognize

d loss

$ –0–

Losses on

sales to a

controlled

corporatio

n (greater

than 50%)

are

disallowe

d under

the related

party

rules. The

corporatio

n’s

adjusted

basis for

the land is

its cost of

$115,000.

b. Jacob’s

realized

and

recognize

d loss is

calculated

as

follows.

Amount

realized

$115,000

Adjusted

basis

(140,000)

Realized

loss

($ 25,000)

Recognize

d loss

$ –0–

Losses on

sales to a

controlled

partnershi

p (greater

than 50%)

are

disallowe

d under

the related

party

rules. The

partnershi

p’s

adjusted

basis for

the land is

its cost of

$115,000.

226. Only items c. (investment realty for investment realty or business realty) and d. (business personalty for business personalty of the same general

business asset class) qualify. Items a. and b. do not qualify because they involve inventory. Item e. does not qualify because foreign realty is

exchanged for domestic realty. Item f. does not qualify because shares of stock are not eligible for like-kind exchange treatment.

227.

a. Amount

realized

($33,000

+

$4,000)

$37,000

Adjusted

basis

(32,000)

Realized

gain

$ 5,000

Recogni

zed gain

$ 4,000

The

realized

gain is

recogniz

ed to the

extent of

the boot

received

of

$4,000.

b. Basis for

smaller

truck:

Fair market value $33,000

Less: Postponed gain (1,000)

Basis $32,000

Basis of

the cash

$ 4,000

228.

a. Amount realized:

Equipment $43,000

Cash 5,000

Liability assumed 12,000 $60,000


Realized gain $16,000

Recognized gain $16,000

The recognized gain is the lesser of the boot received of $17,000 ($12,000 + $5,000) or the realized gain of $16,000.

b. Basis for equipment:


Less: Postponed gain (–0–)

Basis $43,000

Basis of the cash $ 5,000

229.

a. Amount realized ($300,000 + $10,000) $310,000



Recognized loss $ –0–

Section 1031 postponement is mandatory. Thus, the realized loss of $15,000 is postponed.

Basis

for

airplan

e:


Plus: Postponed loss 15,000

Basis $315,000

Basis

of the

cash

$ 10,000

b. Amount realized ($300,000 + $10,000) $310,000




Section 1031 postponement is mandatory. Even though the exchange is with a related party, § 1031 postponement applies. However, if

Jake’s son should dispose of the airplane within two years of the date of the exchange, the realized loss of $15,000 would normally be

recognized as of that date under § 1031. However, since this is a related party transaction, § 267 would then disallow the loss.

Basis

for

airplan

e:


Plus: Postponed loss 15,000

Basis $315,000

Basis

of the

cash

$ 10,000

230.

a. This is a nontaxable like-kind exchange. No gain or loss is recognized, and the basis for the new warehouse (in Ohio) is $560,000, the

same as the basis for the old warehouse (in Michigan).

b. Amount realized:

FMV of Ohio warehouse $525,000

Cash 100,000

$625,000

Adjusted basis of Michigan warehouse (560,000)



FMV of Ohio warehouse $525,000

Less: Postponed gain (–0–)

Basis of New Jersey warehouse $525,000

c. The answer would the same as in b.

231.

a. Amount realized ($500,000 + $45,000) $545,000




Real property located in the United States (Rolla) exchanged for foreign real property (near Madrid) does not qualify as like-kind property.

So the recognized gain is not limited to the boot received of $45,000.

b. FMV of Madrid land $500,000

Less: Postponed gain ($95,000 – $95,000) (–0–)

Basis for Madrid land $500,000

232. All of the replacements qualify as replacement property for purposes of an involuntary conversion. Items a., b., and e. qualify under the

functional use test; item c. qualifies under the like-kind test for condemned realty; and item d. qualifies under the taxpayer use test.

233.

a. Samuel must reinvest at least $950,000, an amount equal to the amount realized. This results in a postponed gain of $350,000 ($950,000

amount realized – $600,000 adjusted basis).

b. Samuel’s basis for the replacement property would be:

FMV of replacement property $950,000

Less: Postponed gain (350,000)

Basis $600,000

c. Since business real property has been condemned, the broader like-kind exchange rules apply. Thus, any realty (i.e., improved or

unimproved) will suffice as replacement property.

d. The earliest date that Samuel can acquire another hotel is May 2, 2013, the date of the threat or imminence of requisition or

condemnation of the property.

e. The latest date that Samuel can acquire another hotel is September 30, 2016 (three years after the close of the tax year in which the

proceeds received are large enough to produce a realized gain).

f. The latest date that Samuel can acquire another hotel is September 30, 2015 (two years after the close of the tax year in which the

proceeds received are large enough to produce a realized gain).

234.

a. Because the conversion of Lucinda’s original property was directly into qualified replacement property, the nonrecognition of the

realized gain of $98,000 ($410,000 amount realized – $312,000 adjusted basis) is mandatory.

b. Due to the mandatory nonrecognition, the basis in the replacement property is a carryover basis of $312,000 ($410,000 – $98,000).

c. The latest date that Lucinda can acquire qualifying replacement property is December 31, 2017 (three years after the close of the tax

year in which the proceeds received are large enough to produce a realized gain).

235.


Adjusted basis of building (475,000)



Less: Reinvestment (490,000)

Deficiency $ 10,000

Since Patty’s objective is to minimize the tax liability, she would elect § 1033 postponement treatment. Thus, her recognized gain would be $10,000.

The basis of the new factory building would be $475,000 ($490,000 cost – $15,000 postponed gain).

236.




Required reinvestment $350,000

Less: Deficiency (recognized gain) (20,000)

Actual reinvestment $330,000

237. Carlos is eligible for § 121 exclusion treatment. At the date of the sale of his residence, he owned and occupied it as his principal residence for

at least two years during the 5-year period ending on the date of sale.

Amount realized ($400,000 – $20,000) $380,000



§ 121 exclusion (250,000)


Whether Carlos replaces his principal residence is not relevant in determining his qualification for the § 121 exclusion. His basis for his new

residence is the cost of $275,000.

238.

Amount realized ($690,000 – $35,000 – $2,000) $653,000



§ 121 exclusion (250,000)


The $5,000 for painting and $3,000 for repairs are personal expenses that do not decrease the amount realized or increase the adjusted basis.

The adjusted basis of the new residence is calculated as follows:

Cost of house $600,000

Cost of new room 25,000

Cost of pool 15,000

Adjusted basis $640,000

239. To qualify for § 121 exclusion treatment on the sale of a principal residence, Katrina must meet the following requirement:

Owned and used the residence as her principal residence for at least two years during the five-year period ending on the date of sale.

Katrina meets this requirement. The ownership and use requirements do not have to be the same period of time. She resided in the house from

January 1, 2013 through June 30, 2016 (a period of three and one-half years). She owned it from January 1, 2015 through December 31, 2017 (a

period of three years). It is not necessary that the property be Katrina’s principal residence at the date of the sale.

Her recognized gain is calculated as follows:

Amount realized ($350,000 – $20,000) $330,000



§ 121 exclusion (180,000)


240. The sale of residence model can be used to calculate the sales price and the realized gain for Etta.

Amount

realized:

Sales price $700,000

Less: Selling expenses (45,000) $655,000

Adjusted

basis

(225,000)

Realized

gain

$430,000

§ 121

exclusion

(250,000)

Recognized

gain

$180,000

The adjusted basis of the new residence is its cost of $760,000 and has no effect on the prior calculations.

241.

Amount realized ($600,000 – $30,000) $570,000



§ 121 exclusion (250,000)


The repair expenses of $15,000 do not affect the calculation.

242. Tan has no recognized gain on the receipt of these assets. Section 1032 provides that a corporation does not recognize any gain or loss on the

receipt of money or other property in exchange for its stock.

243.

a. Amount realized $195,000




Since Richard is Beth’s spouse, Beth’s realized loss of $30,000 is disallowed.

b. Because Richard is Beth’s spouse, he has a carryover basis in the land of $225,000 rather than the $195,000 he paid Ashley.

c. Beth’s recognized loss would be $30,000. Richard’s basis for the investment land would be $195,000.

d. The answers in a. and b. would be the same.

244. Janet has a realized gain of $180,000 ($410,000 – $230,000). However, no gain is recognized as § 1041 provides that transfers of property

between former spouses incident to divorce are nontaxable transactions.

Dave’s basis in the house is a carryover basis of $230,000 (i.e., the same as Janet’s adjusted basis).

245.





Under § 1044, Walter’s realized gain of $20,000 is postponed because he reinvested the sales proceeds in the stock of a specialized small business

investment company within the 60-day period.

Walter’s basis for the stock acquired is calculated as follows:

Cost of new stock $

7

0,

0

0

0

Less: Postponed gain

(

2

0,

0

0

0

)

Basis for new stock $

5

0,

0

0

0

comprehensive volume--chapter 13--property …dec 06, 2013 · comprehensive volume--chapter...

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