Exam 15: Property Transactions: Nontaxable Exchanges

Edith's manufacturing plant is destroyed by fire on the afternoon of November 3,2014.The adjusted basis is $800,000.The insurance company offers a settlement of $700,000.After protracted negotiations,Edith receives $825,000 on June 9,2015.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?

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.

A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

If a taxpayer exchanges like­kind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.

In a nontaxable exchange,the replacement property is assigned a carryover basis if there is a realized gain,but receives a new basis if there is a realized loss.

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

Terry exchanges real estate (acquired on August 25,2008)held for investment for other real estate to be held for investment on September 1,2014.None of the realized gain of $10,000 is recognized,and Terry's adjusted basis for the new real estate is a carryover basis of $80,000.Consequently,Terry's holding period for the new real estate begins on August 25,2008.

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Ross lives in a house he received as a gift from his father.His father had lived in the house for 12 years.The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000.Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000.He incurs selling expenses of $7,000.What is Ross' recognized gain or loss and basis for the new residence?

As part of the divorce agreement,Tyler transfers his ownership interest in their personal residence to Lupe.The house had been jointly owned by Tyler and Lupe and the adjusted basis is $520,000.At the time of the transfer to Lupe,the fair market value is $800,000.What is the recognized gain to Tyler,and what is Lupe's basis for the house?

To qualify as a like-kind exchange,real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.

A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.

On January 5,2014,Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.He has owned and occupied the residence for 15 years.He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale.One month before the sale,Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000.On October 15,2014,Waldo purchases a new home for $600,000.On November 15,2015,he pays $25,000 for completion of a new room on the house,and on January 14,2016,he pays $15,000 for the construction of a pool.What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

Lola owns land as an investor.She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory.The exchange does qualify for like-kind exchange treatment.

Pat owns a 1965 Mustang car which he uses for personal use.He purchased it four years ago for $22,000,and it currently is worth $27,000.He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000.Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

The surrender of depreciated boot (fair market value is less than adjusted basis)in a like-kind exchange can result in the recognition of loss.

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000.What is the recognized gain or loss?

Melissa,age 58,marries Arnold,age 50,on June 1,2014.Melissa decides to sell her principal residence on August 1,2014,which she has owned and occupied for the past 30 years.Arnold has never owned a house.However,while he was married to Kelly who died 6 months prior to his marriage to Melissa,Kelly used the § 121 election on the sale of her residence in January 2012 to reduce her realized gain from $123,000 to $0.Kelly used the sales proceeds to pay off Arnold's gambling debts.Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?

Sammy exchanges equipment used in his business in a like-kind exchange.The property exchanged is as follows: Property Surrendered Property Received Adj. Basis FMV Adj. Basis FMV Equipment \ 44,000 \ 60,000 \ 50,000 \4 3,000 Cash \ 5,000 \5 ,000 Liability on equipment \1 2,000 \1 2,000 Adj. Basis FMV Adj. Basis FMV Equipment \ 44,000 \ 60,000 \ 50,000 \4 3,000 Cash \ 5,000 \5 ,000 Liability on equipment \1 2,000 \1 2,000 The other party assumes the liability. a.What is Sammy's recognized gain or loss? b.What is Sammy's basis for the assets he received?

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.