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Chap11%20HW%20Solutions - 172 CCH Federal Taxation--Basic...

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Unformatted text preview: 172 CCH Federal Taxation--Basic Principles ANSWER TO KEYSTONE PROBLEM--CHAPTER 11 (11,385.) 1. Taxpayers might prefer to have a sale rather than an exchange if they were in a low tax bracket in the year of sale, which would mean that the tax would be relatively low. In such a case, the basis of the newly purchased asset would be higher than the basis of the new asset would be if the transaction were a like-kind exchange. The high basis might be preferable especially if the taxpayer expected to be in higher tax brackets in future years. If a loss would be realized on disposal of an asset, it might be preferable to recognize it through a sale transaction rather than through a like-kind exchange. This could be especially important if the taxpayer were in a high tax bracket in the year of sale and in lower tax brackets in future years when the asset would be depreciated. There may be times when it is better not to make the election for nonrecognition of gain. This could be the case if the taxpayer were in a relatively low tax bracket in the current year or because of an expiring net operating loss carryover which could be offset against the gain. Also, the basis of the new replacement asset would be the cost, which would result in a higher basis than if the gain had not been recognized. 2. ANSWERS TO QUESTIONS--CHAPTER 11 Topical List of Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Sale of Residence: Law (11,001) Sale of Residence: Electing Out of the Exclusion (11,001) Sale of Residence: No Deferral of Gain (11,001) Sale of Residence: Pro-ration of Exclusion (11,015) Sale of Residence: Special Rules (11,015) Sale of Residence: Tax Planning Pointers (11,001) Like-Kind Exchanges (11,201) Like-Kind Exchange v. Sale of Property (11,215) Like-Kind Exchanges: Basis of New Property (11,255) Like-Kind Exchanges: Types (11,215) Like-Kind Exchanges: Boot and Gain or Loss (11,225, 11,235, and 10,035) Involuntary Conversions: Personal Residence (11,015, 11,315, and 11,001) Involuntary Conversions: Types (11,301) Involuntary Conversions: Replacement Property Rules (11,315 and 11,325) Involuntary Conversions: Condemnation (11,301) Involuntary Conversions: Condemnation Replacement Period (11,365) Involuntary Conversions: Losses (11,315) Chapter 11 Instructor's Manual 173 18. 19. 20. Involuntary Conversions: Qualifying Replacement Property Tests (11,345) Nontaxable Exchanges (11,415) Sale of Residence: Adjusted Basis (11,025) Answers to Questions Sale of Residence: Law 1. For sales or exchanges of residences, married taxpayers may exclude up to $500,000 of gain upon the sale of their residence and single taxpayers may exclude up to $250,000 of their gain. Taxpayers must have owned and occupied the residence for two out of the last five years prior to the sale. The exclusion applies to only one sale or exchange every two years. For married taxpayers, the exclusion is allowed if (1) either spouse meets the ownership test, (2) both spouses meet the use test, and (3) neither spouse is ineligible for exclusion because of a sale or exchange of a residence within the last two years. Sale of Residence: Electing Out of the Exclusion 2. Taxpayers may elect out of this exclusion provision for any sale or exchange. Thus, for example, taxpayers who plan to sell within two years two properties that meet the exclusion eligibility requirements and who first sell the property with the lesser gain may choose to elect out of the exclusion to reserve its use for the second sale where the gain is larger. Sale of Residence: No Deferral of Gain 3. Because this exclusion replaces the deferral of gain provision of Code Sec. 1034 and the one-time $125,000 exclusion for taxpayers age 55 or older, application of the exclusion does not result in a reduction of the basis of a replacement residence as was the case under prior law. Sale of Residence: Pro-ration of Exclusion 4. The $250,000 or $500,000 exclusion can be pro-rated if the sale is due to a change in place of employment, health, or unforeseen circumstances even if a taxpayer does not meet the ownership or usage requirement. The amount of the exclusion is $250,000 or $500,000 multiplied by the portion that is the shorter of (1) the aggregate periods during which the ownership and use requirements were met during the five-year period ending on the date of the sale or (2) the period after the date of the most recent sale, bears to two years. Sale of Residence: Special Rules 5. A widowed taxpayer's period of ownership of a residence includes the period the deceased spouse owned and used the property before death. In the case of a residence that is transferred to a taxpayer incident to a divorce, the time during which the taxpayer's spouse or former spouse owned the residence is added to the taxpayer's period of ownership. A taxpayer who owns a residence is considered to have used it as a principal residence while the taxpayer's spouse or former spouse is granted use of the residence under the terms of the divorce or separation instrument. If a taxpayer becomes physically or mentally incapable of self-care, the taxpayer is deemed to use a residence as a principal residence during the time in which the taxpayer owns the residence and resides in a care facility licensed by a state or political subdivision such as in a nursing home. The taxpayer must have owned and used the residence as a principal residence for a period of at least one year during the five years preceding the sale in order to use this provision. Chapter 11 174 CCH Federal Taxation--Basic Principles Sale of Residence: Tax Planning Pointers 6. The taxpayers who can potentially benefit the most from the new law are those who can move frequently. The reason is that these taxpayers can repeatedly use up to the maximum exclusion as long as the sale does not take place more than once every two years. Assume that a married couple own three homes purchased in 1991, 1993, and 1995 and live in the 1995 home and rent out the 1991 and 1993 homes. They can obtain the exclusion on the 1995 home, then move into the 1993 home for two years, sell it, and obtain the exclusion. They then could move into the 1991 home for two years, sell it, and obtain the exclusion on that home. Also, taxpayers who are good at fixing up properties will be able to benefit. These taxpayers can buy a run-down home, fix it up before or while living in it for two years, and then sell it at a profit on which they can obtain the maximum exclusion. They can repeatedly use this approach and thus obtain several exclusions over a relatively short period of time. Good record-keeping is especially important for these taxpayers. Like-Kind Exchanges 7. In nontaxable exchanges, property exchanged for like-kind property is not a change in substance or economic position. The new property is viewed as a continuation of the old investment. Like-Kind Exchange v. Sale of Property 8. A taxpayer might want to avoid the nonrecognition of gain provision and have a sale if the taxpayer is in a low tax bracket or if the gain would receive favorable capital gain treatment. Recognition of gain also increases the basis of the new property, which may be important if the property is depreciable property. Like-Kind Exchanges: Basis of New Property 9. First method: + + + 1 1 1 = Adjusted basis of property given up Boot given Gain recognized Liability assumed by the transferor Boot received Loss recognized Liability assumed by the transferee Basis of the property acquired Second method: 1 + = Fair market value of the property received Deferred gain Deferred loss Basis of the acquired property Like-Kind Exchanges: Types 10. (1) Business for business property. (2) Business for investment property. (3) Investment for business property. (4) Investment for investment property. Like-Kind Exchanges: Boot and Gain or Loss 11. a. Boot is cash or other property that is not like-kind property. Chapter 11 Instructor's Manual 175 b. Postponed gain or loss is deferred gain or loss or gain or loss that is realized but not recognized. In determining the basis of new property acquired in a like-kind exchange, the definition fits in as follows: 1 + = Fair market value of the property received Deferred gain Deferred loss Basis of the acquired property c. d. Realized gain or loss is the difference between the fair market value of the property received and the adjusted basis of the property given up. In like-kind exchanges, generally there is no gain or loss recognized in a boot given situation. The exception is that if the boot given has a difference between the basis and its fair market value, there is gain or loss recognized to that extent. In a boot received situation, gain is recognized to the extent of boot received but not to exceed the gain realized. Losses realized in a boot received situation are not recognized. Involuntary Conversions: Personal Residence 12. Gain situation Casualty Exclude under Code Sec. 121 and election to postpone under the involuntary conversion provisions of Code Sec. 1033 Recognized subject to the personal casualty loss limitations Condemnation Exclude under Code Sec. 121 and election to defer under the provision of Code Sec. 1033 Not recognized Loss situation Involuntary Conversions: Types 13. (1) Destruction. (2) Theft. (3) Seizure. (4) Condemnation. Involuntary Conversions: Replacement Property Rules 14. If the amount realized is greater than the amount reinvested in replacement property, then gain is recognized to the extent of the excess of the amount realized over the amount reinvested. If the amount realized is less than or equal to the amount reinvested in replacement property, then no gain is recognized. Involuntary Conversions: Condemnation 15. The taxpayer is required to obtain confirmation that there has been a decision to acquire the property for public use and must have reasonable grounds to believe that the property will be taken. Involuntary Conversions: Condemnation Replacement Period 16. The allowed period for replacement with qualified property begins on the earlier of the date of disposition of the converted property, or the earliest date of the threat or imminence of the condemnation of the converted property. The taxpayer has until two years after the close of the first taxable year in which any part of the gain is realized from the involuntary conversion to Chapter 11 176 CCH Federal Taxation--Basic Principles replace with qualified property. The taxpayer has three years after the close of the first taxable year in which gain is first realized in the case of condemnations of real property. Involuntary Conversions: Losses 17. Losses realized from involuntary conversions of income-producing or business property are recognized. Casualty and theft losses of personal-use assets are also recognized (subject to limits), but condemnation losses of personal-use assets are not recognized. Involuntary Conversions: Qualifying Replacement Property Tests 18. The taxpayer-use test means that if the taxpayer is an owner-investor, the replacement property must have the same relationship of service or use to the taxpayer as the converted property had. A rental office building replaced with a rental warehouse would qualify. The functional-use test means that if the taxpayer owned and used the property that was converted, the replacement property must be used in the same way as the converted property. A restaurant owned by the user replaced by another restaurant owned by the user would qualify. Nontaxable Exchanges 19. The following exchanges generally qualify for nonrecognition: (1) An insurance contract for another insurance contract. (2) An insurance contract for an endowment or annuity contract. (3) An endowment contract for an annuity contract. (4) An annuity for an annuity contract. (5) An endowment contract for an endowment contract provided that the contract received does not provide for payments sooner than the contract given up. Sale of Residence: Adjusted Basis 20. Adjusted basis of a residence is its cost and commissions, plus any capital improvements, less insurance reimbursements and deductible casualty losses. ANSWERS TO PROBLEMS--CHAPTER 11 Topical List of Problems 21. 22. 23. 24. 25. 26. 27. 28. 29. Sale of Residence: Gain Realization/Exclusion/Recognition (11,001) Sale of Residence: Gain Realization/Exclusion/Recognition (11,001) Sale of Residence: Pro-ration of Exclusion (11,015) Sale of Residence: Divorced Taxpayers (11,015) Sale of Residence: Incapacitated Taxpayers (11,015) Sale of Residence: Involuntary Conversion (11,015) Sale of Residence: Pro-ration of Exclusion (11,015) Like-Kind Exchanges: Types (11,215) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, and 11,255) Chapter 11 Instructor's Manual 177 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,235 and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,245 and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,245 and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,245 and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, 11,245 and 11,255) Like-Kind Exchanges: Basis and Gain or Loss (11,225, 11,235, 11,245, and 11,255) Involuntary Conversions: Condemnation (11,325, 11,345, 11,355, and 11,365) Involuntary Conversions: Condemnation (11,315) Involuntary Conversions: Condemnation (11,315 and 11,325) Involuntary Conversions: Casualty and Replacement Property (11,325 and 11,345) Property Transactions: Taxable Income Computation (11,001, 11,201, 10,145, and 10,175) Multiple Choice--Like-Kind Exchange Basis (11,255) Multiple Choice--Like-Kind Exchanges (11,215) Multiple Choice--Like-Kind Exchanges (11,225, 11,235, and 11,245) Multiple Choice--Sale of Residence: Basis (11,001) Multiple Choice--Multi-Party Exchanges (11,275) Comprehensive Problem--Taxable Income Computation Comprehensive Problem--Taxable Income Computation Research Problem--Sale of Residence Answers to Problems Sale of Residence: Gain Realization/Exclusion/Recognition 21. a. The Lindsays' basis of the residence at the time of the sale is $130,000 and their realized gain is $220,000 ($350,000 less $130,000). They may exclude the total $220,000 realized gain and therefore they have no recognized gain. The Lindsays have a realized gain of $570,000 ($700,000 less $130,000). They may exclude $500,000 and must recognize $70,000. The fact that they moved into another home is irrelevant and there is no opportunity to defer the $70,000 gain through an adjustment in the basis of the new residence as was the case under the old law. The Lindsays have a realized loss of $50,000, but none of it is recognized, since taxpayers are not allowed to deduct losses on the sale of personal-use assets. b. c. Chapter 11 178 CCH Federal Taxation--Basic Principles Sale of Residence: Gain Realization/Exclusion/Recognition 22. a. b. John has a realized gain of $475,000 ($650,000 less $175,000), but as a single individual, he can only exclude $250,000 and he must recognize $225,000. John's exclusion is still $250,000, and he must still recognize $225,000. The fact that he moved into another home is irrelevant and there is no opportunity to defer the $225,000 gain through an adjustment in the basis of the new residence as was the case under the old law. Sale of Residence: Pro-ration of Exclusion 23. a. The Millers have owned and used the home for less than two years, but because they are selling for a job-related reason, they may pro-rate the exclusion. The pro-rated amount of exclusion is $291,667 ($500,000 14 months divided by 24 months = $291,667). Since the realized gain is only $200,000 ($550,000 less $350,000), they can exclude the whole $200,000 and need not recognize any gain. The Millers have a realized gain of $400,000, of which $291,667 is excluded and the remaining $108,333 is recognized. b. Sale of Residence: Divorced Taxpayers 24. a. b. Thomas can exclude the $120,000 gain since he can count the time that Tonya owned the residence which makes the ownership and use more than two years. Tonya can exclude the $120,000 gain since she can count the time that Thomas used the residence as part of the divorce agreement. Sale of Residence: Incapacitated Taxpayers 25. Arnold can exclude the $85,000 gain ($245,000 less $160,000) because he has used the residence at least one year during the preceding five years. Sale of Residence: Involuntary Conversion 26. a. b. Oscar does not recognize any of the $230,000 realized gain on the involuntary conversion of his home by the tornado because it is less than the $250,000 exclusion allowed for a single individual. Oscar has a realized gain of $355,000 ($525,000 less $170,000). He may exclude $250,000 and would have to recognize $105,000 gain. If, however, he purchased a home for $275,000 or more, he could defer the remaining $105,000 of realized gain. The $525,000 would be reduced by the $250,000 gain excluded leaving $275,000 of proceeds to be used when applying the gain deferral provision under the involuntary conversion rules of Code Sec. 1033. Sale of Residence: Pro-ration of Exclusion 27. a. Carl can exclude $156,250 ($250,000 times 15 months divided by 24 months = $156,250). He must recognize $118,750, the difference between the realized gain of $275,000 ($440,000 less $165,000) and the exclusion of $156,250. Carl would still be able to exclude up to $156,250, which is more than the realized gain of $135,000. Therefore, he does not need to recognize any gain. b. Like-Kind Exchanges: Types 28. (a), (b), and (e) are like-kind exchanges. (c) is not a like-kind exchange because it is personality for realty. (d) is not a like-kind exchange because inventory does not qualify under the like-kind provisions. Chapter 11 Instructor's Manual 179 Like-Kind Exchanges: Basis and Gain or Loss 29. Ben's realized and recognized gain is $1,300 and the basis of the new machine is $2,000. FMV of property received ($2,000 + $2,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less: Adjusted basis of property given up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Gain is recognized by Ben to the extent of boot received but not to exceed realized gain. Method I: Basis of old machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Boot received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,200 1,300 2,500 2,000 2,000 0 2,000 4,500 3,200 1,300 1,300 Lester has $300 realized gain, no recognized gain, and the basis of his new machine is $4,200. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,500 Less: Adjusted basis ($1,700 + $2,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ This is a boot given situation for Lester, and therefore no gain is recognized. Method I: Basis of old machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,700 Plus: Boot given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Basis of new machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,200 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,500 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Basis of new machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,200 Like-Kind Exchanges: Basis and Gain or Loss 30. a. Wayne has a realized gain of $300,000, a recognized gain of $100,000, and a basis in the office building of $300,000. FMV of property received ($500,000 + $100,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 Method I: Basis of old asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Less: Boot received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Basis of new asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 0 Chapter 11 180 CCH Federal Taxation--Basic Principles Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Basis of new asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 b. Fred has a realized gain of $150,000, no recognized gain, and a basis of $450,000 in the land. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000 Less: Basis of property given up of $350,000 and cash given up of $100,000 . . . . . . . . . . 450,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 Method I: Basis of old asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000 Plus: Boot given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Basis of new asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450,000 Method II: FMV of new land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 Basis of new asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450,000 c. Wayne has a realized gain of $300,000, no recognized gain, and a basis of $300,000 in the new asset. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Recognized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 Method I: Basis of old asset of $300,000 is the basis of new asset. Method II: FMV of building received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 Basis of new asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Like-Kind Exchanges: Basis and Gain or Loss 31. a. Recognized gain is $20,000, the difference between the fair market value of the stock, $50,000, and its basis of $30,000. Realized gain is as follows: Fair market value of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Less: Basis of property given up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Basis of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 150,000 Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new property is $170,000. Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Basis of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Gain not recognized ($50,000 1 $20,000) . . . . . . . . . . . . . . . . . . Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 $120,000 30,000 20,000 $170,000 $200,000 30,000 $170,000 Chapter 11 Instructor's Manual 181 b. Recognized gain is $60,000, the difference between the fair market value of the stock, $90,000, and its basis of $30,000. Realized gain is still $50,000. Basis of new property is $210,000. Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Plus: Basis of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Plus: Excess of recognized gain over realized gain . . . . . . . . . . . . . . . . . . 10,000 Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000 c. Recognized loss is $10,000, the difference between the fair market value of the stock, $20,000, and its basis of $30,000. Realized gain is still $50,000. Basis of new property is $140,000. Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Plus: Basis of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Less: Loss recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Recognized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Like-Kind Exchanges: Basis and Gain or Loss 32. Susan realized and recognized $27,000 gain and her basis in the new building is $123,000. FMV received ($123,000 + $31,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,000 The mortgage assumed by Tina is treated as boot received to Susan. Method I: Basis of the old building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000 Less: Mortgage assumed by Tina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000 Basis of new building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Basis of new building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,000 Like-Kind Exchanges: Basis and Gain or Loss 33. Allen's realized gain is $186,000, his recognized gain is $165,000, and the basis of the new property is $339,000. FMV received ($360,000 + $165,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $525,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $186,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,000 Chapter 11 182 CCH Federal Taxation--Basic Principles Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,000 Less: Boot received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,000 Method II: FMV of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360,000 Less: Deferred gain ($186,000 1 $165,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,000 Like-Kind Exchanges: Basis and Gain or Loss 34. Charlotte's realized loss is $1,500 and there is no recognized loss in a boot received situation. The basis of the new property is $7,500. FMV received ($6,000 + $3,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Less: Basis given up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 Loss realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($ 1,500) Loss recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,500 Less: Boot received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,500 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000 Plus: Deferred loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,500 Darlene has a realized loss of $2,500 and no recognized loss and the basis of the new property is $11,500. FMV received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Less: Basis given ($8,500 + $3,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,500 Loss realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($ 2,500) Loss recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,500 Plus: Boot given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,500 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Plus: Deferred loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,500 Like-Kind Exchanges: Basis and Gain or Loss 35. Debbie has realized gain of $3,000, recognized gain of $3,000, and the basis of the new property is $10,500. FMV received ($10,500 + $4,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 Less: Basis given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 Chapter 11 Instructor's Manual 183 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Less: Boot received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,500 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,500 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,500 Elizabeth has $1,500 gain realized, no recognized gain, and the basis of her property is $13,500. FMV received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 Less: Basis given ($9,000 + $4,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Method I: Basis of old property $ 9,000 Plus: Boot given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,500 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,500 Like-Kind Exchanges: Basis and Gain or Loss 36. Emmett has a realized gain of $93,000 but no recognized gain. The basis of his new property is $297,000. FMV received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $390,000 Less: Basis given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $207,000 Mortgage assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 297,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Mortgage assumed by Emmett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,000 0 $207,000 90,000 $297,000 $390,000 93,000 $297,000 George has realized gain of $225,000 and recognized gain of $90,000. The basis of his new property is $165,000. FMV received ($300,000 + $90,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $390,000 Less: Basis given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 Less: Mortgage assumed by Emmett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,000 Chapter 11 184 CCH Federal Taxation--Basic Principles Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,000 Like-Kind Exchanges: Basis and Gain or Loss 37. Linda's realized gain is $90,000 and her recognized gain is $40,000. The basis of her acquired property is $150,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Plus: Mortgage assumed by Carol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Less: Mortgage assumed by Linda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000 Gain recognized ($60,000 1 $20,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 Plus: Mortgage assumed by Linda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Less: Mortgage assumed by Carol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Carol's realized gain is $60,000 and her recognized gain is $0. The basis of her acquired property is $180,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000 Plus: Mortgage assumed by Linda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Less: Mortgage assumed by Carol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ It is as if Carol is in a ``boot-given'' situation. Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Plus: Mortgage assumed by Carol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Less: Mortgage assumed by Linda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000 140,000 0 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 Chapter 11 Instructor's Manual 185 Like-Kind Exchanges: Basis and Gain or Loss 38. Peter's realized gain is $75,000 and his recognized gain is $55,000. The basis of his acquired property is $200,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,000 Plus: Mortgage assumed by Charlie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Plus: Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 Less: Mortgage assumed by Peter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $235,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000 Gain recognized (to extent of cash received) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,000 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 Plus: Mortgage assumed by Peter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 Less: Mortgage assumed by Charlie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Less: Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Charlie's realized gain is $100,000 and his recognized gain is $0. The basis of his acquired property is $135,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Mortgage assumed by Peter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Mortgage assumed by Charlie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . It is as if Charlie is in a ``boot-given'' situation. Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Plus: Mortgage assumed by Charlie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Plus: Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 Less: Mortgage assumed by Peter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $235,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,000 $235,000 85,000 45,000 $275,000 175,000 $100,000 $ 0 Chapter 11 186 CCH Federal Taxation--Basic Principles Like-Kind Exchanges: Basis and Gain or Loss 39. a. Chad has a realized gain of $50,000, a recognized gain of $15,000 and a basis in the new property of $105,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Plus: Mortgage assumed by Nash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Less: Mortgage assumed by Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000 Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 Plus: Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Plus: Mortgage assumed by Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 Less: Mortgage assumed by Nash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 Less: Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000 Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000 b. Nash has a realized gain of $20,000, a recognized gain of $0, and a basis in the new property of $130,000. FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Mortgage assumed by Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Mortgage assumed by Nash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consideration received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 Cash given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method I: Basis of old property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Mortgage assumed by Nash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Cash given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Mortgage assumed by Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Method II: FMV of property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of new property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Involuntary Conversions: Condemnation 40. a. Sidney has $160,000 realized gain and, assuming he makes the election, no recognized gain because the purchase price of the replacement property was greater than the condemnation award. The basis of the new property is $140,000 ($300,000 cost of new property 1 gain not recognized of $160,000). $150,000 40,000 35,000 $155,000 135,000 $ 20,000 $ 0 $120,000 35,000 15,000 40,000 $130,000 $150,000 20,000 $130,000 Chapter 11 Instructor's Manual 187 b. The recognized gain is $40,000, the excess of the condemnation award of $280,000 over the replacement cost of $240,000. The basis of the new restaurant is $120,000 (the cost of the new restaurant of $240,000 1 the gain not recognized of $120,000). Sidney has until December 31, 2008, to replace with qualified property because he has until three years after the end of the year in which the proceeds are realized in the case of a condemnation. Sidney has until December 31, 2007, to replace with qualified property because he has until two years after the end of the year in which the proceeds are realized in the case of a casualty. c. d. Involuntary Conversions: Condemnation 41. Gerald has a realized gain of $25,000, but there is no recognized gain because other property was given as the condemnation award. This is a mandatory rule. The basis of the new property is $135,000, the same as the basis of the old property. Involuntary Conversions: Condemnation 42. a. b. Herbert's realized gain is $80,000 ($250,000 1 $170,000). This would be recognized because there was no replacement. (1) Herbert's realized gain is still $80,000 but his recognized gain is only $30,000 ($250,000 1 $220,000) assuming he makes the election. (2) His basis in the new property is $170,000 ($220,000, the cost of the replacement property, less $50,000, the gain not recognized). c. (1) Herbert's realized gain is still $80,000, but he has no recognized gain because the cost of the replacement property is greater than the condemnation award. (2) The basis of the new property is $200,000 ($280,000, the cost of the replacement property, less $80,000, the gain not recognized). d. Herbert's realized loss is $20,000, which is recognized and the basis of the new property is $220,000, the cost of the new property. Involuntary Conversions: Replacement Property 43. a. Steven's realized gain is $80,000 ($200,000 1 $120,000) and he has no recognized gain (assuming he makes the election) because the replacement cost is greater than the insurance award. The basis is $145,000 ($225,000 1 $80,000 gain not recognized). As an owner-user, Steven would not be purchasing qualified property if he replaced the clothing store with a car repair shop. The realized gain of $80,000 is recognized and the basis of his new property is $225,000, the cost of the car repair shop. b. Chapter 11 188 CCH Federal Taxation--Basic Principles Property Transactions: Taxable Income Computation 44. John and Amy have taxable income of $119,610. John's earned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,950 Amy's earned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 Gain on sale of residence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Gain on sale of inherited property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Gain on sale of gift property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,950 Less: Itemized deductions ($12,400 1 3% $2,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,340* Less: Personal exemptions (5 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,610 a. On the sale of the residence, there is a $46,000 realized gain but no recognized gain. Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 Less: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ b. c. d. This is a like-kind exchange without boot received or given; therefore, there is no gain or loss. On the inherited property there is a gain of $15,000 ($45,000 less the $30,000 fair market value at the date of death of the aunt). On the sale of the gift property, there is a $2,000 gain ($10,000 less $8,000, the basis in the hands of the donor). 0 Note: Since the adjusted gross income exceeds $145,950 by $2,000, the itemized deductions of $12,400 are reduced by $60 (3% $2,000) to be $12,340. Multiple Choice--Like-Kind Exchange Basis 45. d. The basis is $46,400 ($14,400, the basis of the old asset, plus the boot given of $32,000). Multiple Choice--Like-Kind Exchanges 46. (c) and (d). An exchange of a machine for a truck is not within the same class. Also, an exchange of real property for personal property is not a like-kind exchange. The items in (a), (b), and (e) are all exchanges of property within the same class and qualify for like-kind treatment as long as they were held for business or investment purposes. Multiple Choice--Like-Kind Exchanges 47. b. A taxable gain or deductible loss must be recognized only on the unlike property given up in a boot given situation, if there is a difference between the fair market value and the basis of the boot property given up. This statement makes (b) true and (d) false. If boot given is money paid, there is no gain or loss recognized, which makes (a) and (c) false. Multiple Choice--Sale of Residence: Basis 48. a. The realized gain is $22,000 ($178,000 1 $156,000), but none of it is recognized because of the exclusion allowance. The basis of the new residence is the purchase price of $250,000. Chapter 11 Instructor's Manual 189 Multiple Choice--Multi-Party Exchanges 49. a. The transaction is nontaxable for Martha. This is a three-party exchange where the new property was both identified and received within the required time periods (45 and 180 days, respectively). Comprehensive Problem--Taxable Income Computation 50. Adam's taxable income is $82,750, computed as follows: Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,000 Sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Land exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 Adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,000 Less: Itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 Less: Personal exemption (1 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200 Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $82,750 a. The basis of the stock received through a gift is $34,000 ($26,000 + $8,000). The gift tax addition of $8,000 is computed as follows: $46,000 1 $26,000 $35,000 $14,000 = $8,000 Therefore, the gain on the sale is $16,000 ($50,000 1 $34,000). b. On the exchange of land for the building, there is a recognized gain of $25,000 as follows: FMV of property received ($335,000 + $25,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 c. d. On the involuntary conversion, there is no recognized gain because the property was converted directly into property. There is no recognized gain on the sale of the residence. Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,000 Less: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $142,500 Less: Adjusted basis of old residence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,500 Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,500 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 Itemized deductions are $6,050 ($3,000 + $750 + $2,300). This is more than his standard deduction of $5,000. Chapter 11 190 CCH Federal Taxation--Basic Principles Comprehensive Problem--Taxable Income Computation 51. Barry and Connie's taxable income is $82,200, computed as follows: Barry's earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,000 Connie's earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Sale of inherited property ($40,000 1 $30,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Less: Loss on sale of gift property ($6,000 1 $7,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000 Less: Standard deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Less: Personal exemptions (4 $3,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,800 Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,200 a. There is no recognized gain on the sale of the residence. Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,000 Less: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,000 Less: Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,000 Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,000 Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,000 Gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ b. c. d. 0 There is a gain of $10,000 on the inherited property ($40,000 1 $30,000, the fair market value at the death of the father). Assuming the gift property is business or investment property, there is a $1,000 loss ($6,000 1 $7,000). There is no gain or loss on the exchange of the Conway Corp. stock. Research Problem--Sale of Residence 52. Since Carl's leave is not considered to be a short, temporary absence, the period of such leave may not be included in determining whether Carl used the house as his principal residence for periods aggregating two years during the five-year period ending on the sale. (See Reg. 1.121-1, especially Example 4 in Reg. 1.121-1(d).) Chapter 11 ...
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