Exam 15: Property Transactions: Nontaxable Exchanges

If there is an involuntary conversion (i.e.,casualty,theft,or condemnation)of the taxpayer's principal residence,the realized gain may be postponed as a § 1033 involuntary conversion or excluded as a § 121 sale of a principal residence.

Evelyn's office building is destroyed by fire on July 12,2012.The adjusted basis is $315,000.She receives insurance proceeds of $350,000 on August 31,2012.Calculate the amount that Evelyn must reinvest in qualifying property in order that her recognized gain be $20,000.Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion)postponement treatment.

Don,who is single,sells his personal residence on October 5,2012,for $380,000.His adjusted basis was $102,000.He pays realtor's commissions of $18,000.He owned and occupied the residence for 14 years.Having decided that he no longer wants the burdens of home ownership,he invests the sales proceeds in a mutual fund and enters into a 1-year lease on an apartment.The detriments of renting,including a crying child next door,cause Don to rethink his decision.Therefore,he purchases another residence on November 6,2013,for $188,000.Is Don eligible for exclusion of gain treatment under § 121 (exclusion of gain on sale of principal residence)? Calculate Don's recognized gain and his basis for the new residence.

In a nontaxable exchange,the replacement property is assigned a carryover basis.

For each of the following involuntary conversions,determine if the property qualifies as replacement property.

During 2012,Howard and Mabel,a married couple,decided to sell their residence.The residence has a basis of $162,000 and has been owned and occupied by them for 11 years.To make it more attractive to prospective buyers,they had it painted in April at a cost of $5,000.The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000.They purchased a new residence in June for $400,000.What is the adjusted basis of the new residence?

Define an involuntary conversion.

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.

Beth sells investment land (adjusted basis of $225,000)that she has owned for 6 years to her husband,Richard,for its fair market value of $195,000.

Jake exchanges an airplane used in his business for a smaller airplane to be used in his business.His adjusted basis for the airplane is $325,000 and the fair market value is $310,000.The fair market value of the smaller airplane is $300,000.In addition,Jake receives cash of $10,000.

Carl sells his principal residence,which has an adjusted basis of $150,000 for $200,000.He incurs selling expenses of $20,000 and legal fees of $2,000.He had purchased another residence one month prior to the sale for $380,000.What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?

How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

Distinguish between a direct involuntary conversion and an indirect involuntary conversion.

The nonrecognition treatment on realized gains of an indirect involuntary conversion of a factory building under § 1033 is elective,while a like-kind exchange of computers under § 1031 is mandatory.

What kinds of property do not qualify under the like-kind provisions?

Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.

If boot is received in a § 1031 like-kind exchange and gain is recognized,which formula correctly calculates the basis for the like-kind property received?

For the following exchanges,indicate which qualify as like-kind property.

Discuss the treatment of realized gains from involuntary conversions.