Exam 15: Property Transactions: Nontaxable Exchanges

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion)and the § 1033 (involuntary conversion postponement of gain)provisions.

If boot is received in a § 1031 like-kind exchange,the recognized gain cannot exceed the realized gain.

Owen and Polly have been married for three years.Owen sells investment property to Polly for a realized loss of $140,000.Owen's loss of $140,000 is disallowed and Polly's basis for the property she purchased is her cost.

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30,2012.On January 11,2013,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 12,2013,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?

Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?

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?

Patty's factory building,which has an adjusted basis of $325,000,is destroyed by fire on March 5,2012.Insurance proceeds of $475,000 are received on May 1,2012.She has a new factory building constructed for $450,000,which she occupies on October 1,2012.Assuming Patty's objective is to minimize the tax liability,calculate her recognized gain or loss and the basis of the new factory building.

Fran was transferred from Phoenix to Atlanta.She sold her Phoenix residence (adjusted basis of $250,000)for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000.Fran had owned and lived in the Phoenix residence for 6 years.What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?

Amy's manufacturing plant is destroyed by fire on the afternoon of October 25,2012.The adjusted basis is $550,000.The insurance company offers a settlement of $520,000.After protracted negotiations,Amy receives $575,000 on June 20,2013.Amy is a fiscal year taxpayer whose tax year ends on June 30th.What is the latest date that Amy can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

Katrina,age 58,rented (as a tenant)the house that was her principal residence from January 1,2012 through December 31,2013.She purchased the house on January 1,2014,for $150,000 and continued to occupy it through June 30,2015.She leased it to a tenant from July 1,2015,through December 31,2016.On January 1,2017,she sells the house for $350,000.She incurs a realtor's commission of $20,000.Calculate her recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire another residence.

Abby exchanges 3,000 shares of Osprey,Inc.,stock for 1,500 shares of Blue Heron,Inc.,stock.Abby's adjusted basis for the Osprey stock is $270,000 and the fair market value of the Blue Heron stock is $300,000.Abby's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $270,000.

Discuss the treatment of losses from involuntary conversions.

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

What effect do the assumption of liabilities have on a § 1031 like-kind exchange?

As part of the divorce agreement,Hugh transfers his ownership interest in their personal residence to Monica.The house had been jointly owned by Hugh and Monica and the adjusted basis is $590,000.At the time of the transfer to Monica,the fair market value is $900,000.What is the recognized gain to Hugh,and what is Monica's basis for the house?

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.

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency,the basis of the replacement property will be more than its cost (cost plus realized gain).

After 5 years of marriage,Dave and Janet decided to get a divorce.As part of the divorce settlement,Janet transfers to Dave the house she purchased prior to their marriage.Janet's adjusted basis for the house is $125,000 and the fair market value is $200,000 on the date of the transfer.What are the tax consequences to Janet and to Dave as a result of the transfer?

Paula inherits a home on July 1,2012,that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent's death.She decides to sell her old principal residence,which she has owned and occupied for 9 years,with an adjusted basis of $125,000 and move into the inherited home.On September 16,2012,she sells the old residence for $600,000.Paula incurs selling expenses of $30,000 and legal fees of $2,000.She decides to add a pool,deck,pool house,and recreation room to the inherited home at a cost of $100,000.These additions are completed and paid for on November 1,2012.What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

Joyce,a farmer,has the following events occur during the tax year.Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?