Deck 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges

Question 1

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Answer 1

True

Question 2

In computing the amount realized when the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used.

Answer 2

True

Question 3

Wade is a salesman for a real estate development company.Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000.The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000.Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis - $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).

Answer 3

False

Question 4

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Question 5

If Wal-Mart stock increases in value during the tax year by $6,000, the amount realized is a positive $6,000.

Question 6

Monroe's delivery truck is damaged in an accident.His adjusted basis for the delivery truck prior to the accident is $20,000.If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his adjusted basis for the delivery truck after the accident is $21,000.

Question 7

In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Question 8

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Question 9

A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized.

Question 10

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made.The amount of the amortized premium is treated as an interest deduction.

Question 11

A taxpayer who has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold should use either a weighted average approach or a LIFO approach.

Question 12

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium.On the later sale of the bond for $10,800, she has amortized $300 of the premium.Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).

Question 13

The amount of a corporate distribution qualifying for capital recovery treatment that exceeds the shareholder- recipient's basis in the stock investment is treated as a capital gain.

Question 14

If a seller assumes the buyer's liability on the property acquired, the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Question 15

If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in recognized gain but cannot result in a recognized loss.

Question 16

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Question 17

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Question 18

Reggie owns all the stock of Amethyst, Inc.(adjusted basis of $100,000).If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Question 19

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Question 20

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922.Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922).

Question 21

Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.

Question 22

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Question 23

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.

Question 24

Broker's commissions, legal fees, and points paid by the seller reduce the seller's amount realized.

Question 25

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Question 26

The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000.If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 cash to her niece.

Question 27

The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

Question 28

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Question 29

Parker bought a brand new Ferrari on January 1, 2019, for $125,000.Parker was fatally injured in an auto accident on June 23, 2019, when the fair market value of the car was $105,000.Parker was driving a loaner car from the Ferrari dealership while his car was being serviced.In his will, Parker left the Ferrari to his best friend, Ryan.Ryan's holding period for the Ferrari begins on January 1, 2019.

Question 30

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000.Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000.Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Question 31

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Question 32

Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method associated with the purchase of a business.

Question 33

The holding period for nontaxable stock dividends that are the same type (i.e., common on common) includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are not the same type (i.e., preferred on common) is new and begins on the date the dividend is received.

Question 34

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000.If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Question 35

If losses are disallowed in a related-party transaction, the holding period for the buyer includes the holding period of the seller.

Question 36

Gene purchased for $45,000 an SUV that he uses 100% for personal purposes.When the SUV is worth $30,000, he contributes it to his business.The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.

Question 37

The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift (assuming no gift taxes are paid).The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.

Question 38

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Question 39

The holding period for property acquired by gift is automatically long term.

Question 40

Transactions between related parties that result in disallowed losses might later provide a tax benefit to the related party buyer.

Question 41

An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.

Question 42

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.

Question 43

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.

Question 44

When boot in the form of cash is given in a like-kind exchange, recognized gain is the greater of the boot or the realized gain.

Question 45

Pat owns a 1965 Ford Mustang that 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.

Question 46

Nontaxable stock dividends result in no change to the total basis of the old and new stock, but the basis per share decreases.

Question 47

In a nontaxable exchange, recognition is postponed.In a tax-free transaction, nonrecognition is permanent.

Question 48

A loss from the sale of a personal use asset that would be disallowed cannot be recognized even if the taxpayer converts the asset to business use prior to its sale.

Question 49

The terms "realized gain" and "recognized gain" can be used interchangeably; they mean the same thing.

Question 50

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.

Question 51

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

Question 52

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.

Question 53

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

Question 54

In general, the amount realized from a sale of property does not include any liability assumed by the buyer.

Question 55

Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock.Leonore's adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000.Leonore's recognized gain is $0, and her adjusted basis for the Blue Heron stock is $300,000.

Question 56

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

Question 57

The adjusted basis of an asset is the original cost (or basis) plus capital recoveries less capital additions.

Question 58

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.

Question 59

The wash sales rules apply to both gains and losses.

Question 60

The basis of property acquired in a bargain purchase is its cost.

Question 61

The basis of boot received in a like-kind exchange is its fair market value unless the realized gain is a smaller amount.

Question 62

If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Question 63

If a taxpayer exchanges like-kind property and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction.

Question 64

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.

Question 65

Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000).In addition, he receives cash of $6,000.If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000, and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).

Question 66

Kendra owns a home in Atlanta.Her company transfers her to Chicago on January 2, 2019, and she sells the Atlanta house in early February 2019.She purchases a residence in Chicago on February 3, 2019.On December 15, 2019, Kendra's company transfers her to Los Angeles.In January 2020, she sells the Chicago residence and purchases a residence in Los Angeles.Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home.

Question 67

Bria's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane.Due to a 30% co-insurance clause, Bria receives insurance proceeds of $192,500 two months after the date of the loss.One month later, Bria uses the insurance proceeds to purchase a new office building for $275,000.Her adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Question 68

Wyatt sells his principal residence in December 2019 and qualifies for the § 121 exclusion.He sells another principal residence in November 2020.Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

Question 69

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.

Question 70

Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

Question 71

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the five years preceding the date of sale and owned by the taxpayer as the principal residence for the last two of those years.

Question 72

Milt's building, which houses his retail sporting goods store, is destroyed by a flood.Sandra's warehouse, which she is leasing to Milt to store the inventory of his business, also is destroyed in the same flood.Both Milt and Sandra receive insurance proceeds that result in a realized gain.Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Question 73

Terry exchanges real estate (acquired on August 25, 2013) held for investment for other real estate to be held for investment on September 1, 2019.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, 2013.

Question 74

If a taxpayer reinvests the net proceeds (amount received minus related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain.

Question 75

If an election to postpone gain under § 1033 is made, the holding period of replacement property includes the holding period of the involuntarily converted property.

Question 76

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Question 77

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.

Question 78

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).

Question 79

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.

Question 80

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) that is destroyed by a tornado in October 2019.He receives insurance proceeds of $250,000 in January 2020.If before 2022, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.