Exam 12: Nonrecognition Transactions

Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.

Rationale for nonrecognition includes which of the following? I.A refinement of the realization concept,which postpones recognition of appreciation in value until the taxpayer disposes of a property,or its replacement. II.Under the Substance-over-form doctrine,new property acquired in a transaction is viewed as a continuation of the original investment. III.The taxpayer lacks wherewithal to pay the tax on a realized gain because the amount realized on the transaction is reinvested in the replacement asset. ​

Which of the following is/are correct concerning a principal residence? I.A principal residence can be a house,condominium,mobile home,or houseboat. II.A taxpayer can have more than one principal residence at a time. ​

Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for Roscoe's investment realty with a basis of $170,000.What is his basis in the new real estate?

Match each statement with the correct term below. -Realized gain

Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business.He purchased the machine 3 years ago for $22,000 and had taken depreciation of $9,000 on the machine.In the exchange,Norman also receives $3,000 of cash.As a result of the exchange, I.Norman realizes a loss of $4,000 on the exchange. II.Norman's basis in the acquired machine is $13,000. ​

Compare the deferral of recognition of losses resulting from an involuntary conversion with the deferrals for like-kind exchanges.

Which of the following qualify as a like-kind exchange? -Office building for office equipment.

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.

Nancy purchased her houseboat six years ago for $35,000.She has lived in the houseboat since she purchased it.A friend has offered $62,000 for the houseboat.If she sells it,she will be able to exclude the gain.

Which of the following qualifies as a like-kind exchange of property? I.Commercial retail building and its land for an office building and its land. II.Louisiana Oil,Inc.common stock for Louisiana Oil,Inc.corporate bonds. ​

Match each statement with the correct term below. -Wherewithal-to-pay

In general,qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.

The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any deferred gain.

Karen owns a commercial office building with a fair market value of $140,000.She purchased the building as an investment for $102,000 in 2003.She has claimed $18,000 in depreciation deductions.Karen trades the building for an apartment complex.The apartment complex has a value of $140,000,and the exchange qualifies for like-kind deferral treatment.What is Karen's basis in the apartment complex?

Match each statement with the correct term below. -Involuntary conversion

For a transaction to qualify as a third-party exchange, I.The exchange must be completed within 1 year of the first exchange. II.The property exchanged must be identified within 45 days of the first exchange. ​

Belinda exchanges investment real estate with Russell.Belinda's adjusted basis in her two-year old property is $280,000.The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged.Russell assumes that debt.Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange.Russell pays Belinda enough in cash to balance the exchange.What is Belinda's basis in the new land?

Which of the following qualify as a like-kind exchange? -Computer for delivery truck.

Which of the following is/are correct regarding involuntary conversions? I.Gains may be deferred if the property involuntarily converted is replaced with property that is similar to or related in service or use to the converted property. II.Deferral of gains is elective only if direct conversion is made into similar property. ​