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Exam 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges

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Question 51

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The adjusted basis of an asset is the original cost or basis) plus capital recoveries less capital additions.

A) True
B) False

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Question 52

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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.

A) True
B) False

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Question 53

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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.

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.

Capital recoveries include:

Wyatt sells his principal residence in December 2018 and qualifies for the § 121 exclusion.He sells another principal residence in November 2019.Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

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 building located in Virginia used in business) exchanged for a building located in France used in business) cannot qualify for like-kind exchange treatment.

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

Parker bought a brand new Ferrari on January 1, 2018, for $125,000.Parker was fatally injured in an auto accident on June 23, 2018, 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, 2018.

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

Nontaxable stock dividends result in:

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.

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.

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.

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).

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.

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

Dennis, a calendar year taxpayer, owns a warehouse adjusted basis of $190,000) which is destroyed by a tornado in October 2018.He receives insurance proceeds of $250,000 in January 2019.If before 2021, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

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).