Exam 12: Non-Recognition Transactions

Nancy acquired office equipment for her business in 2010 at a cost of $15,000. During the current year, she exchanges the equipment for different equipment with a fair market value of $9,000. MACRS depreciation on the original equipment was $9,828. The exchange qualifies as a like-kind exchange. Immediately after the exchange Nancy sells the new equipment for $9,000 cash. What is the amount and character of the gain recognized?

When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.

Which of the following qualify as replacement property under the involuntary conversion rules? I. Mayfield Ice Cream Company's production plant is destroyed by a hurricane. The insurance proceeds are used to replace the plant with a refrigerated storage container. II. Mayfield Ice Cream Company's production plant is destroyed by a fire. They sign a five year lease for a replacement production facility, and the insurance proceeds are then used to buy an office building

Lindsey exchanges investment real estate parcels with Donna. Her adjusted basis in the property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is the amount of gain recognized by Lindsey?

Grant exchanges an old pizza oven from his business for a new oven. In addition to the old oven, which has a basis of $10,000, Grant pays $4,000 cash and takes out a loan on the new oven for $6,000. The new oven is valued at $22,000. What is Grant's recognized gain or loss due on this transaction?

Which of the following statements is/are correct? I. The carryover-holding period only applies if the property exchanged is personal-use property. II. The holding period of like-kind property received includes the holding period of the property exchanged.

A fire destroyed Jimmy's Teeshirt Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire. Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds. I. Jimmy has a realized gain of $50,000. II. Jimmy has a recognized gain of $50,000.

Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of $2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob's Auto Sales and Loan Company. Bob assumes Rosilyn's loan balance. How much boot does Rosilyn receive in the transaction?

Iris' personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Iris receives a condemnation award of $1,000,000. She uses the award to purchase a new residence for $1,150,000. The adjusted basis of the former residence was $1,100,000 at the date of the condemnation. Determine Iris's recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answers.

Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value of $185,000. The city of Springfield condemns the property for a new airport. The condemnation award is $185,000. Natural Power invests the $185,000 in a new warehouse on the other side of the city. What is the gain or loss that Natural Power Corporation must recognize due to the transactions?

Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in. As long as they file a joint return they can each claim a $250,000 exclusion.

Commonalties of nonrecognition transactions include that I. deferring a loss is mandatory on like-kind exchanges. II. deferring a loss is mandatory on involuntary conversions.

For related parties to qualify for a like-kind exchange, the property received must be held for six months.

Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory? I. Involuntary conversion of business real estate. II. Like-kind exchange of business real estate.

A gain on a like-kind exchange is always recognized to the extent of any boot received.

Discuss the concepts underlying the determination of the basis of property received in a nontaxable exchange.

Charlotte purchases a residence for $105,000 on April 13, 2006. On July 1, 2012, she marries Howard and they use Charlotte's house as their principal residence. On May 12, 2014, they sell their home for $390,000, incurring $20,000 of selling expenses and purchase another residence costing $350,000. What is their realized and recognized gain?

The recognition of a loss realized on an involuntary conversion is mandatory.

Norm acquired office equipment for his business at a cost of $10,000. After two years of use, Norm exchanges the equipment for different equipment with a fair market value of $7,000. MACRS depreciation on the original equipment was $4,753 The exchange qualifies as a like-kind exchange. Immediately after the exchange Norm sells the new equipment for $7,000 cash. What is the amount and character of the gain recognized?

Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of $2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob's Auto Sales and Loan Company. Bob assumes Rosilyn's loan balance. What is Rosilyn's realized gain on the transaction?