Exam 15: Property Transactions: Nontaxable Exchanges

Edith's manufacturing plant is destroyed by fire on the afternoon of November 3, 2018. The adjusted basis is $800,000. The insurance company offers a settlement of $700,000. After protracted negotiations, Edith receives $825,000 on June 9, 2019. Edith is a fiscal year taxpayer whose tax year ends on June 30th. What is the latest date that Edith can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

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.

Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.

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.

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.

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

Which of the following statements is correct?

What effect do the assumption of liabilities have on a § 1031 like-kind exchange?

Evelyn's office building is destroyed by fire on July 12, 2018. The adjusted basis is $315,000. She receives insurance proceeds of $350,000 on August 31, 2018. 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.

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?

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).

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

Kendra owns a home in Atlanta. Her company transfers her to Chicago on January 2, 2018, and she sells the Atlanta house in early February 2018. She purchases a residence in Chicago on February 3, 2018. On December 15, 2018, Kendra's company transfers her to Los Angeles. In January 2019, she sells the Chicago residence and purchases a residence in Los Angeles. Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home.

Discuss the treatment of realized gains from involuntary conversions.

Libby's principal residence is destroyed by a tornado. She is single and her realized gain is $360,000. Is it possible for Libby's recognized gain to be $0?

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.

Edward, age 52, leased a house for one year in Memphis with an option to buy as his personal residence. At the end of the lease, he purchased the house. He lived there for an additional 26 months before his employer transferred him to Tucson. Expecting to be in Tucson for 18 to 24 months, he rented the Memphis house for 18 months with an option to extend on a month to month basis for an additional 6 months. At the end of the 18-month period, Edward's employer offered him a permanent position in Tucson as branch manager. The tenant who had been occupying Edward's house in Memphis purchased it at the end of the 24-month extended lease period. Is Edward eligible to elect exclusion treatment under § 121?

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:

During 2018, 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?