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Solutions to Tax Research Problems
15-50 Regulation 1.1031(j)-1 deals with exchanges of multiple properties. Under this regulation, assets must be broken down into exchange groups. An exchange group is made up of assets of like-kind or like-class, as defined in Reg. 1.1031(a)-2. In this example, the exchange groups are fairly obvious: automobiles, computers, and other. Since the goodwill and covenant-not-to-compete do not qualify as like-class properties, T recognizes $90,000 and U recognizes $60,000. U has an exchange group deficiency for the automobiles. His gain recognized on the autos is the lesser of the gain realized on the autos or the exchange group deficiency ($50,000). Since U's basis is not given, this cannot be determined. T has an exchange group deficiency on the computers. His gain recognized on the computers is the lesser of the exchange group deficiency ($30,000) or the gain realized on the computers [$60,000 $65,000 ($5,000)]. T recognizes no gain or loss on the computers because losses are not recognized. In summary, T recognizes gain of $90,000 due to the goodwill and the covenant-not-to-compete. 555- 15-1 15
True or False 1. A taxpayer is able to use 121 even if he or she temporarily rents his or her primary residence while trying to sell it. 2. B purchased a residence on April 12, 20X1 for $120,000. B moved in immediately and lived in the home until it sold for $165,000 on March 25, 20X4. B may exclude all of the gain even though the home was not owned for five years. 3. A loss on the sale of a principal residence may be deducted in the year of sale as a capital loss. 4. C purchased a mobile home for $78,000 for use as her residence on June 12, 20X1. She moved in immediately. On June 12, 20X2, C was transferred to a new job. She rented the mobile home for six months before she sold it for $108,000. C may exclude $15,000 (i.e., $30,000 gain 1 year/2 years). 5. K currently owns two residences. She lived in the first from January 1, 20X1 until June 30, 20X4. She lived in the second from July 1, 20X4 until June 30, 20X6. Both residences have been owned since January 1, 20X1 and were either rented or vacant when not occupied by K. K can sell both residences on June 30, 20X6 and exclude her entire gain. 6. J and H sold their jointly owned residence at a $325,000 gain during the current year. J owned the residence for four years and lived in it the entire time. After their wedding, J transferred a one-half interest to H, who immediately moved in and lived in the home for 18 months. J and H can exclude only $250,000 of their gain. 7. If a husband and wife divorce and their jointly owned residence is transferred to one spouse six months after the divorce, no gain or loss is recognized. 8. A single taxpayer who meets the ownership and use tests may exclude gain of $250,000 on the sale of her principal residence under 121. Any gain in excess of $250,000 must be recognized. 15-3 15-4 Chapter 15 Nontaxable Exchanges 9. If a husband and wife own their principal residence jointly, both must meet the ownership and occupancy tests to exclude the gain under 121. 10. 11. Section 121 could apply to a boat used as a principal residence and sold at a gain. An involuntary conversion due to a casualty need not meet the "suddenness" test that is applied to the casualty loss deduction. Involuntary conversion treatment under 1033 applies to gains and losses. An involuntary conversion of rental real estate property requires replacement with property that serves the same "taxpayer use." This means that the property need only be replaced with other rental property. Section 1033, dealing with involuntary conversions, is mandatory if all requirements are met (even if the taxpayer receives only cash). Growing timber that is leveled by a natural disaster may be sold in its normal market. If it is replaced, the gain can be deferred if it is replaced by property that is similar or related in use. A taxpayer who owns rental property that lies in the formally announced path of a future highway may sell the property to a private party and defer any gain just as if the property had been condemned by a government agency. The owner/operator of a hamburger stand that has been condemned to make way for a highway must find replacement property of similar "functional" use to defer gain under 1033. Bonds and debentures do not qualify for like-kind exchange treatment. U.S. currency is always considered boot in a like-kind exchange. Like-kind exchange treatment only applies if no property other than "like-kind property" is received. Liabilities discharged generally are treated as boot, equivalent to money, received in a like-kind exchange. Like-kind exchange treatment is elective. G exchanged a rent house for another specified rent house to be received five months later. This qualifies as a like-kind exchange. F exchanged a vacant lot held for investment for a factory building to be used in her manufacturing business. These properties are like-kind properties to F. Y exchanges a rent house, which he owned outright (i.e., no liabilities existed), for an apartment complex. The apartment complex was subject to a $150,000 mortgage, and to make the deal even, Y received $3,400 cash. Y must recognize part or all of the realized gain on this exchange. Many changes in the form of doing business, such as the receipt of an interest on formation of a partnership in exchange for property, are allowed to occur without gain recognition. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Test Bank 15-5 Multiple Choice 27. Which of the following is not true of principal residences? a. b. c. d. "Principal residence" can refer only to property which the taxpayer owns. A taxpayer cannot occupy two principal residences at the same time. If a taxpayer rents out his or her former principal residence while trying to sell it, it may still qualify as the taxpayer's principal residence for purposes of 121. A taxpayer can exclude gain only on the sale of one property every two years. 28. J sold her qualifying personal residence for $275,000. She incurred selling expenses of $6,000 and "fixup expenses" of $3,000. J's adjusted basis in her residence was $137,000. What are the amounts of J's gain realized and gain recognized, respectively? a. b. c. d. $132,000; $132,000 $132,000; $0 $129,000; $0 $129,000; $129,000 29. P, a single individual, purchased a new home on April 1, 20X1 for $375,000. On July 1, 20X2, P sold the property for $490,000, so she could take a new job 300 miles from her old home. The new job involved a promotion. How much gain must P recognize? a. b. c. d. $115,000 $71,875 $44,125 $0 30. Q, a single individual, purchased a new home on July 1, 20X1 for $265,000. On July 1, 20X2, Q moved into a convalescent home due to a chronic disease. The home remained vacant for three months and was rented for nine months while Q was institutionalized. Then the home was sold at a gain of $175,000. How much gain must Q recognize? a. b. c. d. $175,000 $50,000 $87,500 $0 31. Y owns a home in which she has lived with her spouse, Z, for seven years. On June 2, 20X2, the home was sold at a gain of $325,000. How much gain must Y recognize? a. b. c. d. $325,000 if Y files separately $0 if Y and Z file jointly $75,000, regardless of filing status $0, regardless of filing status 32. Which of the following is true of the exclusion of gain under 121? a. b. c. d. The taxpayer (or spouse) must be 55 years of age or older on the date of sale of the principal residence in order to apply the exclusion. The residence must have been used as a principal residence by the owner/taxpayer (or spouse) for at least two years within the five-year period ending on the date of sale. The exclusion is elective but may not be revoked. The exclusion may be used only once by a taxpayer. 15-6 Chapter 15 Nontaxable Exchanges 33. Which of the following is true about the gain excluded on the sale of a personal residence by certain individuals? a. b. c. d. The taxpayer generally must be at least 55 years of age on the date of sale. If husband and wife sell a jointly owned residence, both must be at least 55 years of age. The residence must have been used by the taxpayer as his/her personal residence for at least five of the seven years preceding the sale. Any portion of gain in excess of the limit must be recognized. Only one residence qualifies for this exclusion during a person's lifetime. 34. Q, who is 62 years of age, sold her principal residence for $340,000 and elected to exclude the maximum amount under 121 for an unmarried person. The residence cost $85,000 several years ago. Selling costs of $3,000 were incurred. If Q purchases a replacement residence within two years for $120,000, how much gain must she recognize and what is her basis in the replacement home, respectively? a. b. c. d. $252,000; $120,000 $2,000; $0 $2,000; $120,000 $126,000; $120,000 35. Which of the following is not considered an involuntary conversion? a. b. c. d. Voluntary sale of property after public announcement that it will be condemned for use as a highway right of way Weather damage that meets all tests for casualty loss treatment except the suddenness test Theft of property Actual condemnation of property because it was structurally unsuitable for occupancy 36. Which of the following is not necessarily true of the replacement property in an involuntary conversion? a. b. c. d. The replacement property must be purchased within two years of the conversion. If the converted property is real estate used by the taxpayer, the replacement property must serve the same basic function as the converted property. For condemned real property used in a business, broader groups of replacement properties and a longer reinvestment period (an additional year) are allowed. The replacement property may not have been owned by the taxpayer prior to the conversion or the threat of condemnation. 37. D owned a building with an adjusted basis of $40,000 that was destroyed by fire. Insurance paid $55,000 in a settlement. Assuming D reinvests $52,000 in eligible property within the statutory period, which of the following is a possible outcome? a. b. c. d. Gain of $3,000 is recognized by D, and the basis in the new property is $40,000. No gain is recognized by D, and the basis in the new property is $40,000. Gain of $15,000 is recognized by D, and the basis in the new property is $52,000. More than one of the above 38. An apartment complex owned by H, a calendar year individual taxpayer, was destroyed in a landslide on January 12, 19X6. The apartments (including the land) had cost $600,000 and had an adjusted basis of $250,000. The insurance company paid $445,000 for the land and damaged buildings on March 12, 19X6. Which of the following is not necessarily true? a. b. c. d. To be eligible for deferral, H must purchase other real estate to be used as rental property. To be eligible for deferral, H must reinvest by March 12, 19X8. In order to avoid recognizing any gain on this insurance settlement, H must reinvest at least $445,000. Even if H reinvests, the $195,000 gain can be recognized, and the basis in the replacement will be its full cost. Test Bank 15-7 39. A warehouse owned and used by Company Z was involuntarily converted by casualty. Which of the following will qualify as a replacement property, subject to nonrecognition of gain? a. b. c. d. e. Another warehouse purchased, provided that the amount reinvested equals or exceeds the amount realized from the converted property A vacant parcel of land Rental real property Another warehouse already owned by Company Z More than one of the above 40. G lost his small manufacturing facility to fire during the current year. The building originally cost $35,000 and had been depreciated in the amount of $22,000. His insurance company paid him $42,000 for a total loss, and he had a new building constructed 18 months later at a cost of $40,500. How much gain must G recognize on this casualty? a. b. c. d. $5,500 $29,000 $13,000 $1,500 41. Which of the following types of business or investment property are not excluded from like-kind exchange treatment? a. b. c. d. Securities Livestock of the same species but exchanged for the other sex Inventory held for sale Business machines 42. Which of the following is not true of like-kind exchange treatment? a. b. c. d. It is mandatory. It applies to losses as well as gains. Liabilities discharged generally are treated as boot received. It applies to exchanges of inventory. 43. D exchanged an apartment complex that he had owned for eight years for farm land. The apartment complex was worth $1,050,000 and D's basis was $475,000. The transferee assumed a note secured by an interest in the property of $800,000. D received $10,000 cash and assumed liability for loans against the farm land he received in the amount of $700,000. How much is D's gain recognized and his basis in the farm land (fair market value = $940,000), respectively? a. b. c. d. $110,000 and $475,000 $110,000 and $465,000 $0 and $365,000 $10,000 and $375,000 44. Which of the following exchanges of property (used for business or investment purposes) are not likekind exchanges? a. b. c. d. Warehouse for condominium Beach house for yacht Cadillac business car for an Escort business car Apartment building for vacant lot 15-8 Chapter 15 Nontaxable Exchanges 45. Which of the following is not true of like-kind exchanges of real property? a. b. c. d. Improved real estate is not considered a like-kind exchange for unimproved real estate. A lease on real property with a remaining term of at least 30 years is treated as real property in a like-kind exchange. Condemned real estate in an involuntary conversion is treated under the like-kind rules. Real property in a like-kind exchange need not be of the same class. 46. B exchanges investment land with an adjusted basis of $40,000 for another parcel of investment land with a fair market value of $50,000 plus $12,000 in cash. What is B's recognized gain on this exchange? a. b. c. d. $12,000 $20,000 $22,000 No gain is recognized. 47. B exchanges investment land with an adjusted basis of $55,000 for another parcel of investment land with a fair market value of $50,000 plus $12,000 in cash. B recognizes how much gain? a. b. c. d. $12,000 $7,000 $5,000 No gain is recognized. 48. B transfers investment land with an adjusted basis of $70,000 for other investment land with a fair market value of $50,000 plus $12,000 in cash. B recognizes how much gain or loss? a. b. c. d. $20,000 loss $8,000 loss $12,000 gain No gain or loss is recognized. 49. M traded in her business computer at a local dealer. Her cost in the old machine was $3,500 and her basis was $1,470. She paid $1,500 cash in the trade for a computer worth $4,000. How much is M's recognized gain or loss, and what is her basis in the new computer, respectively? a. b. c. d. $0 and $1,470 $0 and $2,970 $1,030 and $4,000 $530 and $3,500 50. M exchanged a vacant lot worth $32,500 for farm land worth $28,500. M received $1,000 down and will receive $1,000 per year for each of the three following years. M's basis in the lot was $29,000. How much gain must M recognize in each of the four years, respectively? a. b. c. d. $1,000; $1,000; $1,000; $500 $875; $875; $875; $875 $3,500; $0; $0; $0 $500; $1,000; $1,000; $1,000 51. Which of the following is not true of boot in a like-kind exchange? a. b. c. d. Liabilities discharged in a like-kind exchange are considered boot received. Boot received (other than liabilities) can be offset by net liabilities incurred. The receipt of boot does not cause the recognition of any realized losses in a like-kind exchange. The payment of boot may be offset against liabilities discharged. Test Bank 15-9 52. X exchanged rental property worth $40,000 with an adjusted basis of $25,000 and no liabilities, for Y's rental property worth $75,000 which had an adjusted basis of $57,000 and which was subject to a mortgage of $40,000. Y also transferred to X $5,000 worth of stock in which Y had an adjusted basis of $3,000. The gains recognized by X and Y, respectively, in this exchange are: a. b. c. d. $5,000; $18,000 $13,000; $22,000 $13,000; $20,000 $5,000; $20,000 53. In order to qualify for nonrecognition, property acquired in a delayed exchange must be a. b. c. d. Specified by the transferee as the replacement property within 45 days after the date when the transferor surrenders the property Received by the transferee within 180 days of the transfer, but no later than the due date including extensions, of the tax return for the year in which the transfer occurs Both a. and b. Either a. or b. 54. Which of the following exchanges is not considered a nontaxable transaction? a. b. c. d. Transfer of property to a partnership in exchange for a partnership interest Transfer of property owned by a controlling shareholder to the corporation in exchange for stock Exchange of common stock for common stock of the same corporation All of the above are nontaxable transactions. 55. Which of the following is not true of rollover gains from low-income housing sales? a. b. c. d. The gain on the sale may be deferred if the property is sold to the tenants, a tenant cooperative, or any nonprofit organization formed for the sole benefit of the tenants. To qualify for a deferral, the sale must be approved by the Secretary of Housing and Urban Development. The owner of the property may defer gain indefinitely until another qualified low-housing project is purchased. Both b. and c., above, are not true. 56. A gain may be deferred on the exchange of a life insurance contract for a. b. c. d. Another life insurance policy Certain annuity contracts Certain endowment contracts All of the above 15
Solutions to Test Bank
True or False 1. True. The residence needs to be the taxpayer's principal residence for two of the five years preceding the sale. Even the rental or nonqualified use exception does not apply if the taxpayers does not move back in to the residence. (See pp. 15-5, 15-11 to 15-13, and 121.) 2. True. All that is required is that B have lived in and owned the home for two years (within the five years preceding the date of sale). (See. p, 15-5.) 3. False. Losses on the sale of personal use property are not deductible. [See p. 15-4 and 165(c).] 4. False on two counts. C may exclude her entire gain. The maximum excludable is $125,000 (i.e., $250,000 1 year/2 years). However, C must recapture depreciation to the extent allowed or allowable. (See pp. 15-6 and 15-10 to 15-11.) 5. False. Even though both residences otherwise qualify, only one qualifying sale can be made every two years. (See p. 15-7 and 121(b)(3).) 6. True. To qualify for the $500,000 exclusion, both spouses must have used the residence for two years as their principal residence. However, since J meets both the ownership and use tests, the $250,000 exclusion applies. (See p. 15-6.) 7. True. Under 1041, no gain or loss is recognized on a transfer between spouses incident to divorce or within one year of divorce. If the transferee spouse later sells the residence, he or she must recognize any gain or exclude it under 121. (See p. 14-15.) 8. True. The limit is $250,000. (See pp. 15-6.) 9. False. Only one spouse needs to meet the use and ownership tests. Both must meet the use test to qualify for the $500,000 exclusion; but only one, for the $250,000 exclusion. [See p. 15-6 and 121(b).] 10. 11. True. Section 121 allows the exclusion of gains on the sale of a principal residence, and is not limited to real property. [See p. 15-5.] True. This requirement is not applied. (See p. 15-16.)
15-11 15-12 Chapter 15 Nontaxable Exchanges 12. 13. 14. 15. 16. 17. False. 1033 only applies to gains. Losses cannot be recognized on qualifying involuntary conversion. (See p. 15-16.) True. The test for rental properties is more flexible than the test for property used by the taxpayer/owner. (See pp. 15-18 and 15-19.) False. This provision is elective if the taxpayer receives money or other property in the conversion. (See Example 34 and pp. 15-16 and 15-20.) True. A natural disaster is an involuntary conversion, and if the sold property is replaced, gain can be deferred. (See p. 15-15.) True. Threat or imminence of condemnation exists in such a situation. (See p. 15-16.) False. Ordinarily replacement property must serve the same functional use as the converted property served. Thus, a bowling alley destroyed by fire may not be replaced by a billiard center and still qualify for 1033 nonrecognition. However, when property is condemned by a governmental authority, e.g., to build a road, the proceeds from the conversion of the business or trade property may be used to purchase any business or investment real property and still qualify for 1033 nonrecognition. The liberal rule for like-kind exchanges of real property is used. [See pp. 15-18 and 15-19 and 1033(g).] True. All evidences of indebtedness are specifically excluded from the qualified properties. [See p. 15-25 and 1031(a).] True. This seems readily obvious, but taxpayers have argued that money held for its value as a precious metal or a collectible should qualify. The IRS does not agree. (See p. 15-28.) False. Other property (i.e., boot) may be received. Any gain realized is recognized to the extent of the boot. (Recognized gain is never more than realized gain.) Any remaining gain or loss is deferred. [See Examples 39 through 41, pp. 15-28 and 15-29, and 1031(b).] True. The net liabilities discharged are treated as boot received. [See Examples 43 through 45, pp. 15-28 and 15-29, and 1031(d).] False. If the tests are met, like-kind treatment is mandatory. [See Example 54, p. 15-35, and 1031(a).] True. Non-simultaneous exchanges are acceptable if the exchanged property is identified within 45 days and transferred within 180 days. (See p. 15-34.) True. Even though one is held for investment and the other is held for business and one is improved and the other is unimproved, they qualify as like-kind since they are real property and both are held either for investment or for use in a trade or business. (See p. 15-25.) True. Even though liabilities assumed are treated as boot paid, they may not be netted against other boot received. (See p. 15-29.) True. Section 351 applies to contributions to controlled corporations for stock and 721 applies to contributions to partnerships for capital interest. (See p. 15-38.) 18. 19. 20. 21. 22. 23. 24. 25. 26. Multiple Choice 27. a. A principal residence is the one in which the taxpayer actually lives, regardless of whether the property is owned or rented. Furthermore, it is possible for a taxpayer to temporarily own more than one residence that qualifies as a principle residence (i.e., two residences may have been used as one's principal residence for two of the previous five years), but at any given time, an individual can have only one principal residence. (See pp. 15-3 and 15-5.) The gain realized is the sales price of $275,000, reduced by selling expenses of $6,000 and the adjusted basis of $137,000. The entire $132,000 gain is excludable (See p. 15-3). 28. b. Solutions to Test Bank 15-13 29. 30. d. d. P's gain of $115,000 is fully excludable. The maximum excludable is $156,250 (i.e., $250,000 15 months/24 months). (See p. 15-8.) Q is deemed to have lived in the home for the period of time that she lived in the convalescent home. As a result, the entire gain ($250,000 21 months/24 months = maximum) is excludable since the sale was due to unanticipated circumstances. (See p. 15-10.) If Y and Z file jointly, the entire gain is excludable because the $500,000 limit applies. (See p. 15-5.) The ownership and use tests are two of the five years preceding the sale. (See p. 15-5.) Gain in excess of the limit must be recognized. (See p. 15-6.) The gain realized is $252,000. $250,000 is excludable, leaving $2,000 to be recognized. Her basis in the replacement property is cost. (See 15-6.) Only condemnations of property for public use by a governmental body will qualify. Condemnations due to structural defects or failure to meet sanitary standards do not qualify. (See pp. 15-14 and 15-15.) The replacement period terminates at the end of the second taxable year following the year in which gain was first realized, which is almost always more than two years. In some cases, three years (or four years) is used. [See Examples 31 and 32, p. 15-19 through 15-20, and 1033(a) and (g).] Since 1033 treatment is elective, both a. and c. are possible. If the election is made, a is appropriate; otherwise, c is correct. (See pp. 15-18 through 15-19.) H must reinvest by the last day of the second taxable year following the receipt of the insurance settlement (i.e., December 31, 19X8). The other statements are true. (See pp. 15-17 to 15-18.) Cash used to acquire similar replacement property qualifies for nonrecognition. Because land and rental property are not considered to have the same use as a storage facility, they will not qualify. Also, property already owned by the taxpayer will not qualify. [See pp. 15-17 and 15-18 and 1033(a) and 1033(a)(1)(A)(I).] The gain recognized is the lesser of the gain realized of $29,000 or the amount not reinvested of $1,500 ($42,000 $40,500). [See Examples 28 and 29, pp. 15-17 through 15-18, and 1033(a).] Securities and inventory held for sale are excluded from like-kind exchange treatment. Livestock of different sexes are also excluded because they do not have the same use. [See pp. 15-23 through 15-27 and 1031(a)(2) and 1031(e).] Inventory is among the unqualified properties. [See pp. 15-23 through 15-27 and 1031(a).] The gain recognized is limited to the cash received ($10,000) plus the net liabilities discharged ($100,000). The basis is $475,000 (Method 1: $940,000 $475,000 $10,000 and Method 2: $475,000 $800,000 $700,000 $10,000 $110,000). [See Examples 34 through 36, pp. 15-27 through 15-33, and 1031(d).] "Like-kind" refers to the character of the property, for example, whether it is real or personal. Therefore, an exchange of real estate for personal property does not qualify as a like-kind exchange. An exchange of real estate for real estate will almost always qualify for 1031 postponement. Exchanges of personal property must be for similar property to qualify. (See pp. 15-24 through 15-27 and 1031.) Any exchange of realty for realty is generally considered to meet the like-kind test; whether the property is improved or unimproved is immaterial. (See p. 15-25 and 1031.) B must recognize as gain the lesser amount of boot received ($12,000) or realized gain ($22,000). (See Example 34 and pp. 15-27 and 15-28.) 31. 32. 33. 34. 35. 36. b. b. c. c. d. a. 37. 38. 39. d. b. a. 40. 41. d. d. 42. 43. d. a. 44. b. 45. 46. a. a. 15-14 Chapter 15 Nontaxable Exchanges 47. 48. b. d. In this case, the recognized gain is the lesser of boot received ($12,000) or the realized gain of $7,000 (amount realized of $62,000 minus basis of $55,000). (See Example 40 and p. 15-28.) Although B realized a loss, it is not recognized. Losses in a like-kind exchange are not recognized, regardless of whether any boot was received. In this case, the "boot" was paid with no effect. (See Example 41 and p. 15-28.) A trade-in of business-use property is generally a like-kind exchange, qualifying for deferral. In this case, no gain is recognized and the basis is $2,970 (Method 1: $1,470 $1,500 boot paid and Method 2: $4,000 $1,030). (See Exhibit 15-3 and pp. 15-28 and 15-29.) When boot property is to be received on an installment basis, the gain to be recognized, in this case $3,500, is prorated over the total collections, in this case $4,000. The resulting gross profit ratio is 0.875 ($3,500/$4,000). [See p. 15-27, and 453(f) and 1031.] Such boot received cannot be offset by other liabilities incurred. However, other boot paid may be offset against liabilities discharged. [See pp. 15-28 and 15-29 and 1031(a) and (c).] The gains realized are calculated as follows: X FMV of property received Rental property ($75,000) Stock ($5,000) Less mortgage assumed Amount realized Less adjusted basis of property given up Gain realized Boot received 49. b. 50. b. 51. 52. b. d. $ 80,000 (40,000) $ 40,000 (25,000) $ 15,000 $ 5,000 Y FMV of property received Plus liabilities discharged Minus boot paid Amount realized Less adjusted basis in property given up rental property Gain realized--Rental property Gain realized--boot Boot received--net $ 40,000 40,000 (5,000) $ 75,000 (57,000) $ 18,000 $ 2,000 $ 35,000 (See pp. 15-28 through 15-33.) 53. 54. 55. 56. c. d. c. d. Property in a like-kind exchange need not be exchanged simultaneously. However, to qualify for nonrecognition, both conditions in a. and b. must be met. [See p. 15-33 and 1031(a)(3).] All of the transactions are allowed to be made without recognition of taxable gain or loss. (See pp. 15-38 and 15-39 and 351, 355, and 1036.) The owner may elect to defer the gain if another qualified low-income housing project is purchased within a specified time limit, including any extensions allowed by the IRS. (See p. 15-39 and 1039.) Section 1035 provides what is and is not allowed on exchanges of insurance policies. (See p. 15-39.) 15
1. Alice Berra, age 45, sold her principal residence of 15 years during the current year. The residence originally cost $130,000, improvements of $22,000 were made, and repairs costing $2,400 were done and paid for six weeks before the sales agreement was reached. Alice received $240,000 cash, was discharged of a mortgage loan of $36,000, and paid selling costs of $16,400. a. Calculate the following: Amount realized Gain realized Gain recognized $ $ $ b. Specify the proper treatment of each of the following expenses related to Alice's residence: Interest on the residence mortgage while Alice lived there Interest on the residence after Alice moved to another city to take a new job Real property transfer taxes paid on the sale by Alice Realtor fees paid related to purchase of residence in city of new job Real property taxes paid for year of sale Repairs performed in anticipation of the sale c. If Alice also sold corporate stock that was held for four years at a loss of $2,600, how would that loss be treated? 15-15 15-16 Chapter 15 Nontaxable Exchanges 2. Elliot Mess exchanged a 12-unit apartment complex with Alfred Cappy for a 100-space mini-warehouse property. Elliot was also required to pay cash of $200,000. The transaction is summarized as follows: Apartments: Fair market value Liability assumed by Alfred Adjusted basis to Elliot Fair market value Liability assumed by Elliot Adjusted basis to Alfred $480,000 200,000 250,000 $790,000 310,000 690,000 Mini warehouses: a. Determine the following for Elliot and Alfred, respectively: Elliot Gain or loss realized Gain or loss recognized Basis in property received $ $ $ Alfred Gain or loss realized Gain or loss recognized Basis in property received $ $ $ b. Are Elliot's apartments (and mini-warehouses) a passive activity? Describe the proper treatment of the interest and property taxes paid on the units. Solutions to Comprehensive Problems 15-17 Solutions to Comprehensive Problems
1. Alice's basis is $152,000 ($130,000 $22,000). Fix-up expenses of $2,400 were incurred and paid for six weeks before the sales agreement was reached. Alice received $240,000 cash, was discharged of a mortgage loan of $36,000, and paid selling costs of $16,400. She fully intends to reinvest within the statutory period to defer any gain. a. Calculate the following: Amount realized ($240,000 $36,000 $16,400) Gain realized ($259,600 $152,000) Gain recognized ($107,600 is excluded) b. $259,600 $107,600 $ 0 Specify the proper treatment of each of the following expenses related to Alice's residence: Interest while Alice lived there is deductible as residence interest Interest after Alice moved is still residence interest if she intends to sell Real property transfer taxes are selling costs Realtor fees to purchase a residence is either a moving expense (deductible within limits if a qualifying move) or part of the basis of the new residence Real property taxes paid for the year of sale are deductible up to the date of sale and reimbursable by a buyer for the period following the sale c. 2. a. Elliot Gain or loss realized Gain or loss recognized Boot 0 ("boot" was paid) Basis in like-kind property received $790,000 fair market value $230,000 deferred gain Gain or loss realized Gain or loss recognized Boot $310,000 ($310,000 $200,000 $200,000 cash) Basis in like-kind property received $480,000 $0 (i.e., no gain is deferred) 11$230,000 $ 0 Since the gain on the residence is excluded, the $2,600 is a net 15% capital loss (N15CL). $560,000 Alfred $100,000 $100,000 $480,000 b. Yes, rental real estate is a passive activity. The interest and taxes are fully deductible in arriving at the net passive activity profit or loss for the year. If there is a net loss, it is suspended, but the interest and taxes are not separately suspended. ...
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- Spring '11