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Exam 7: Basis, Gain and Loss, and Nontaxable Exchanges

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Question 1

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

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The property received is considered to be a continuation of the property exchanged (i.e., nothing of economic significance has occurred).Therefore, a realized gain or realized loss is not recognized, and the property received has a carryover basis and holding period.

Question 2

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Katie sells her personal use automobile for $12,000.She purchased the car three years ago for $25,000.What is Katie's recognized gain or loss?

A) $0.
B) $12,000.
C) ($13,000) .
D) ($25,000) .
E) None of the above.

F) A) and D)
G) A) and B)

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Question 3

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In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt.The aunt had owned the stock (adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000) or $75,000.

The basis of personal use property converted to business use is:

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

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1, 2018.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

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.

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?

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).

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).

Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

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.

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

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

​Alvin is employed by an automobile dealership as its manager.As such, he purchased an SUV for $32,000 (fair market value is $48,000) .No other employees are permitted a discount.What is Alvin's basis in the SUV?

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).

Why is it generally undesirable to pass property by death when its fair market value is less than basis?

Dena owns 500 acres of farm land in southeastern Maryland.Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land.She exchanges the land for an office building owned by Chris in Newark, New Jersey.The building has a fair market value of $900,000.Chris assumes Dena's mortgage on the land.What is the amount of Dena's recognized gain or loss on the exchange?

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.