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

Jamie is terminally ill and does not expect to live much longer.Pondering the consequences of her estate, she decides how to allocate her property to her nephews.She makes a gift of depreciated property (i.e., adjusted basis exceeds fair market value) to Will, a gift of appreciated property (i.e., fair market value exceeds adjusted basis) to Jim, and leaves appreciated property to Sam in her will.Each of the properties has the same fair market value.From an income tax perspective, which nephew is her favorite?

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?

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.

When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?

Tariq sold certain U.S.Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction.He felt that the U.S.Government and State of Oregon bonds were "good" investments, so he repurchased identical securities within one week.Do these transactions constitute wash sales? If the bond sales resulted in the recognition of gain (rather than loss), would the wash sale provisions prevent the gains from being recognized?

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

In 2013, 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 2017.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 building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.

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.

In determining the basis of like-kind property received, postponed losses are:

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?

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?

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.

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.

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.

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

Paula inherits a home on July 1, 2017 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, 2017, 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, 2017.What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

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?

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.

For a corporate distribution of cash or other property to a shareholder, when does dividend income or a return of capital result?