Exam 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

For each of the following involuntary conversions, determine whether 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 that is destroyed by a flood. Since the tenant occupancy rate was down, she uses the insurance proceeds to purchase an office building that 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.

Eunice Jean exchanges land held for investment located in Rolla, MO, 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?

Alyssa's personal residence (adjusted basis of $100,000) was condemned, and she received a condemnation award of $80,000. Alyssa used the condemnation proceeds to purchase a new residence for $90,000. What is Alyssa's recognized gain or loss and her basis in the new residence?

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

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.

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2019. On January 11, 2020, 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, 2020, 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?

Yolanda buys a house in the mountains for $450,000 that 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?

Emily's manufacturing plant is destroyed by fire on the afternoon of November 3, 2019. The adjusted basis is $800,000. The insurance company offers a settlement of $700,000. After protracted negotiations, Emily receives $825,000 on June 9, 2020. Emily is a fiscal year taxpayer and her tax year ends on June 30. What is the latest date that Emily can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

Patty's factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2019. Insurance proceeds of $500,000 are received on June 1, 2019. She has a new factory building constructed for $490,000, which she occupies on October 1, 2019. Assuming Patty's objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

Sam and Cheryl, husband and wife, own property jointly. The property has an adjusted basis of $400,000 and a fair market value of $500,000. a. Discuss the rules for the calculation of the adjusted basis of the property to Sam if he inherits his wife's share of the property and Sam and Cheryl live in a community property state. b. If they live in a common law state?

Monroe's delivery truck is damaged in an accident. His 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.

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.

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. 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 a. What are the tax consequences to Merle and Ned? b. Would Ned recognize any gain if he sold the stock for $41,000?

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

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?

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?

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

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

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2019. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1,2020. He builds a new office building at a cost of $845,000 that is completed and paid for on December 31, 2022. 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?

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2019, for $11,000. The maturity date is December 31, 2028. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2019, and the adjusted basis for the bonds at the end of 2019, assuming straight-line amortization is appropriate?