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Exam 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

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Question 41

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

A) True
B) False

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Question 42

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Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV that she will use exclusively in her business. This exchange qualifies for nontaxable exchange treatment.

A) True
B) False

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Question 43

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On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000) . The property transfers were made subject to the mortgages. What amount of gain should Paula recognize?

Use the following data to determine the sales price of Toby's principal residence and the realized gain. He is not married. The sale of the old residence qualifies for the § 121 exclusion. $\begin{array} { l r } \text { Selling expenses } & \$ 45,000 \\\text { Recognized gain } & 180,000 \\\text { Cost of new residence } & 760,000 \\\text { Adjusted basis of old residence } & 225,000 \\\S 121 \text { exclusion } & 250,000\end{array}$

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.

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery) ?

Sammy exchanges land 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 Land $44,000 $60,000 $50,000 $43,000 Cash $ 5,000 $ 5,000 Liability on land $12,000 $12,000 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?

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

Paula inherits a home on July 1, 2019 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. Paula decides to sell her old principal residence, which she has owned and occupied for nine years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2019, 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, 2019. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

Matt, who is single, sells his principal residence, which he has owned and occupied for five years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale, he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.

Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as joint tenants in 2015 for $300,000. In 2019, Diane dies and bequeaths her share of the land to Robert. The land has a fair market value of $450,000. What is Robert's adjusted basis for the land?

Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a niece.

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

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.

Terry owns Lakeside, Inc. stock (adjusted basis of $80,000), which she sells to her brother, Jake, for $64,000 (its fair market value). Eighteen months later, Jake sells the stock to Pamela, a friend, for $78,000 (its fair market value). What is Terry's recognized loss, Jake's recognized gain or loss, and Pamela's adjusted basis for the stock? $\begin{array}{lll}\text { Terry's Recognized Loss }&\text { Jake's Recognized Gain(Loss) }&\text { Pamela'sBasis }\\\end{array}$ A) $\begin{array}{lll}&&\$-0- &&&&&&&&& \$-0- &&&&&&&&& \$ 78,000 \\\end{array}$ B) $\begin{array}{lll}&&\$-0- &&&&&&&&& \$ 14,000 && &&&&&&&\$ 64,000 \\\end{array}$ C) $\begin{array}{lll}&&\$-0- &&&&&&&&& \$ 14,000 &&&&&&&&& \$ 78,000 \\\end{array}$ D) $\begin{array}{lll} && \$ 16,000&&&&&&& & \$ 14,000 &&&&&&&&&& \$ 78,000 \end{array}$ E) $\text { None of these. }$

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.

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

On January 2, 2019, Todd converts his house into a rental property. Todd's basis in the house is $400,000, and its fair market value on the date of conversion is $376,000. What is Todd's basis for purposes of MACRS cost recovery?

If a taxpayer purchases taxable bonds at a premium, the amortization of the premium is elective. However, if a taxpayer purchases tax-exempt bonds at a premium, the amortization of the premium is mandatory. Explain this difference in the treatment.

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.