Chapter 13- PROPERTY TRANSACTIONS: DETERMINATION OF GAIN OR LOSS, BASIS CONSIDERATIONS, AND NONTAXABLE EXCHANGES

Barry makes some unwise financial arrangements with the local chapter of the Mob. Before long, Barry is dead broke and has no choice but to set fire to his own house and pay off Ricky "Two Shoes" Vinetti with the settlement from the insurance company. The transformation of Barry's house into a smoldering ruin is considered an involuntary conversion.

False Barry may have felt like he had "no choice;" nevertheless, a voluntary act, such as a taxpayer destroying his own property by arson, is not an involuntary conversion.

Exchanging unimproved land for a warehouse is not a like-kind exchange.

False Land and warehouses are both realty.

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

True The seller's amount realized is increased by the amount of the liabilities assumed by the buyer.

Graham owns land with an adjusted basis of $20,000 and a fair market value of $50,000. If the property is going to be given to Graham's nephew, it is preferable for the transfer to be by inheritance rather than by gift.

True If the land is transferred by gift, the adjusted basis to the donee will be a carryover basis (i.e., $20,000 adjusted for gift taxes paid on the appreciation). If the land is transferred by inheritance, the adjusted basis to the donee will be the fair market value at the date of the decedent's death (i.e., around $50,000).

Christina sells a parcel of land for $18,000 in cash and the buyer assumes Christina's mortgage of $12,000 on the land. Christina's amount realized is $30,000.

True The amount realized includes the cash of $18,000 and the mortgage of $12,000 assumed by the buyer.

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

True When a personal use asset is converted to business or income-producing use, the loss basis is the lower of the asset's adjusted basis or fair market value on the date of conversion.

Jennifer purchased 100 shares of Basil Corporation stock for $11,500 on January 1, 2004. In the current tax year, she sells 25 shares of the 100 shares purchased on January 1, 2004, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Jennifer's recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier? a. $0 recognized loss, $3,375 basis in new stock. b. $0 recognized loss, $3,000 basis in new stock. c. $0 recognized loss, $3,450 basis in new stock. d. $375 recognized loss, $3,000 basis in new stock. e. None of these choices are correct.

a. $0 recognized loss, $3,375 basis in new stock. Amount realized $2,500 Adjusted basis (25 × $115) (2,875) Realized loss $ (375) Recognized loss $ -0- Since the transaction qualifies as a wash sale, the realized loss of $375 is disallowed. This amount is added to the adjusted basis of the shares purchased 25 days earlier. Therefore, the adjusted basis for these shares is $3,375 ($3,000 + $375).

Sienna exchanges a rental building that has an adjusted basis of $520,000 for investment land that has a fair market value of $700,000. In addition, Sienna receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land? a. $100,000; $520,000. b. $100,000; $420,000. c. $280,000; $700,000. d. $0; $420,000. e. None of these choices are correct.

a. $100,000; $520,000. Amount realized ($700,000 + $100,000) $800,000 Adjusted basis (520,000) Realized gain $280,000 Recognized gain $100,000 The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to the amount of the boot received is recognized. The basis of the land is calculated as follows: FMV $700,000 Less: Postponed gain (180,000) Basis $520,000

Miller's office building with an adjusted basis of $625,000 and a fair market value of $885,000 is condemned on December 30, 2016. Miller is a calendar year taxpayer. He receives a condemnation award of $850,000 on March 1, 2017. He builds a new office building at a cost of $830,000, which is completed and paid for on December 31, 2019. What is Miller's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition? a. $20,000; $625,000. b. $20,000; $830,000. c. $225,000; $830,000. d. $0; $605,000. e. None of these choices are correct.

a. $20,000; $625,000. Amount realized $ 850,000 Adjusted basis (625,000) Realized gain $ 225,000 Amount realized $ 850,000 Less: Reinvestment (830,000) Deficiency $ 20,000 Since the form of the involuntary conversion is a condemnation, Miller has until December 31, 2019, to reinvest the proceeds from the condemned office building in like-kind property. So Miller qualifies to elect § 1033 postponement treatment. Since the amount of the deficiency is less than the realized gain, the recognized gain is $20,000. The basis for the new office building is $625,000 ($830,000 - $205,000 postponed gain).

During 2017, Crenshaw and Mariah, a married couple, decided to sell their residence, which had a basis of $225,000. They had owned and occupied the residence for 16 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $10,000 and paid for the work immediately. They sold the house in May for $795,000. Broker's commissions and other selling expenses amounted to $45,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain? a. $25,000. b. $15,000. c. $525,000. d. $0. e. None of these choices are correct.

a. $25,000. Amount realized ($795,000 - $45,000) $750,000 Adjusted basis (225,000) Realized gain $525,000 § 121 exclusion (500,000) Recognized gain $ 25,000 The $10,000 of painting expenses affect neither the seller's amount realized nor the adjusted basis.

Chelsea owns 200 acres of farmland is southeastern Kentucky. Her adjusted basis for the land is $525,000, and there is a $390,000 mortgage on the land. She exchanges the land for an office building owned by Norbert in Albany, New York. The building has a fair market value of $450,000. Norbert assumes Chelsea's mortgage on the land. What is the amount of Chelsea's recognized gain or loss on the exchange? a. $315,000. b. $390,000. c. $840,000. d. $0. e. None of these choices are correct.

a. $315,000. Amount realized: Office building (FMV) $450,000 Mortgage on land 390,000 $840,000 Adjusted basis (525,000) Realized gain $315,000 Recognized gain $315,000 The mortgage is treated as boot. The recognized gain is the lesser of the realized gain ($315,000) or the boot received of $390,000.

Jackson purchased 5,000 shares of Tortoise Corporation stock at $10 per share. Two years later, he received a 5 percent common stock dividend. At that time, the common stock of Tortoise Corporation had a fair market value of $12.50 per share. What is the basis of the Tortoise Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend? a. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain. b. $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain. c. $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain. d. $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain. e. None of these choices are correct.

a. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain. The $50,000 cost of the original shares must be allocated to the total shares owned after the stock dividend (5,000 + 250 = 5,250). Therefore, the basis per share is $9.52 ($50,000/5,250). No gain is recognized on the receipt of the stock dividend.

Brandon, is considering gifting to Dena, his daughter. Regarding Brandon's income tax position, which of the following items would be the best to gift? (Assume no gift tax) a. Land fair market value $25,000, the adjusted basis is $5,000. b. Cash of $25,000. c. Land fair market value $25,000, the adjusted basis is $25,000. d. Land fair market value $25,000, the adjusted basis is $50,000. e. None of these choices are correct.

a. Land fair market value $25,000, the adjusted basis is $5,000. A donor can achieve several tax advantages by making gifts of appreciated property. The donor avoids income tax on the unrealized gain that would have occurred had the property been sold. And if the donee is in a lower tax bracket than the donor, there will be tax savings if the property is sold. Both the cash and the land that has equal FMV to adjusted basis, has no tax advantage of gifting. The land in the loss position (AB greater than the FMV) should be sold to realize the loss and then gift the cash

Meredith was transferred from Detroit to Dallas. She sold her Detroit residence (adjusted basis of $180,000) for a realized loss of $40,000 and purchased a new residence in Dallas for $225,000. What is Meredith's recognized gain or loss on the sale of the Detroit residence and her basis for the residence in Dallas? a. ($40,000); $180,000. b. $0; $225,000. c. ($40,000); $225,000. d. $0; $220,000. e. None of these choices are correct.

b. $0; $225,000. The realized loss of $40,000 on the sale of the Detroit residence is disallowed. The basis for the new Dallas residence is the purchase price of $225,000.

Over the past 25 years, Jethro has purchased 380 shares of Lavender, Inc., common stock. His first purchase was in 1990 when he acquired 30 shares for $20 a share. In 1992, Jethro bought 150 shares at $10 a share. In 2011, Jethro acquired 200 shares at $50 a share. Jethro intends to sell 125 shares at $60 per share in the current year. If Jethro's objective is to minimize gain, what is his recognized gain? a. $3,520 b. $1,250 c. $6,250 d. $5,950 e. None of these choices are correct.

b. $1,250 Jethro can minimize his recognized gain by selling the 125 shares from the lot acquired in 2011 (the specific identification method). Amount realized 125 shares @ $60 per share $7,500 Adjusted basis 125 shares at $50 per share (6,250) Realized gain $1,250 Recognized gain $1,250

Sandy is an executive at Yummy Yogurt. Because she loves the yogurt so much, in the current year she decides to buy a yogurt machine from Yummy for $9,300. The machine cost the company $9,000 (the wholesale price), and it has a fair market value of $12,500 (price at which sold at retail). Only executives are permitted to buy yogurt machines at a discount. What is Sandy's adjusted basis for the yogurt machine, and how much must she include in her gross income? a. $12,500 basis, $3,500 gross income. b. $9,300 basis, $3,200 gross income. c. $12,500 basis, $3,200 gross income. d. $9,300 basis, $3,500 gross income. e. None of these choices are correct.

c. $12,500 basis, $3,200 gross income. The adjusted basis of property acquired in a bargain purchase is the asset's fair market value ($12,500). Income of $3,200 ($12,500 FMV - $9,300 cost) is recognized by Sandy.

Erica is an executive at Gourmet Yogurt. Because she loves the yogurt so much, in the current year she decides to buy a yogurt machine from Gourmet for $10,300. The machine cost the company $10,000 (the wholesale price), and it has a fair market value of $13,500 (price at which sold at retail). Only executives are permitted to buy yogurt machines at a discount. What is Erica's adjusted basis for the yogurt machine, and how much must she include in her gross income? a. $10,300 basis, $3,200 gross income. b. $13,500 basis, $3,500 gross income. c. $13,500 basis, $3,200 gross income. d. $10,300 basis, $3,500 gross income. e. None of these choices are correct.

c. $13,500 basis, $3,200 gross income. The adjusted basis of property acquired in a bargain purchase is the asset's fair market value ($13,500). Income of $3,200 ($13,500 FMV - $10,300 cost) is recognized by Erica.

Rebecca purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss? a. $6,130. b. $0. c. $69,130. d. $37,630. e. None of these choices are correct.

c. $69,130. Amount realized $120,000 Adjusted basis ($52,000 - $1,130) (50,870) Realized gain $ 69,130 Recognized gain $ 69,130

Jeffrey, a calendar year taxpayer, owns a dry cleaning business (adjusted basis of $220,000). The business is destroyed by a hurricane on October 28, 2017. Jeffrey receives insurance proceeds of $250,000 on January 4, 2018. What is the latest date Jeffrey can reinvest the proceeds in qualified property to avoid recognition of any realized gain? a. January 31, 2020. b. December 31, 2019. c. December 31, 2020. d. October 31, 2019. e. None of these choices are correct.

c. December 31, 2020. Jeffrey has a realized gain of $30,000 ($250,000 amount realized - $220,000 adjusted basis). In order to postpone the gain, Jeffrey must reinvest the $250,000 insurance proceeds in qualified replacement property by December 31, 2020 (i.e., two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain).

Polly inherits land that had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2017, the date of the decedent's death. The executor distributes the land to Polly on November 12, 2017, at which time the fair market value is $49,000. The fair market value on February 4, 2018, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Polly sells the land on June 10, 2018, for $48,000. What is her recognized gain or loss? a. $(47,000). b. $(2,000). c. $1,000. d. $(1,000). e. None of these choices are correct.

d. $(1,000). Polly's basis for the inherited property is $49,000 (i.e., the fair market value on the date of distribution) because the alternate valuation date was elected by the executor. Thus, the recognized loss is calculated as follows: Amount realized $48,000 Basis (49,000) Recognized loss $(1,000)

Dillon received dining room furniture as a gift from her friend, Alice. Alice's adjusted basis was $9,200, and the fair market value on the date of the gift was $7,000. Dillon decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss? a. $(2,700). b. $(500). c. $6,500. d. $0. e. None of these choices are correct.

d. $0. Dillon has a loss basis of $7,000 (the lower of the adjusted basis of $9,200 or the fair market value of $7,000 on the date of the gift) for the furniture. Therefore, sale proceeds of $6,500 result in a realized loss of $500 ($6,500 amount realized - $7,000 adjusted basis). This is a loss on a personal asset and is not recognized.

Robin sells her personal use automobile for $27,000. She purchased the car five years ago for $45,000. What is Robin's recognized gain or loss? a. $(27,000). b. $18,000. c. $(45,000). d. $0. e. None of these choices are correct.

d. $0. The automobile is a personal use asset. Thus, none of the realized loss of $18,000 ($27,000 - $45,000) is recognized.

As part of the divorce agreement, Andrew transfers his ownership interest in their personal residence to Lorraine. The house had been jointly owned by Andrew and Lorraine, and the adjusted basis is $410,000. At the time of the transfer to Lorraine, the fair market value is $600,000. What is the recognized gain to Andrew, and what is Lorraine's basis for the house? a. $95,000; $410,000 b. $0; $600,000 c. $190,000; $600,000 d. $0; $410,000 e. None of these choices are correct.

d. $0; $410,000 Section 1041 provides for nontaxable exchange treatment for the transfer of Andrew's ownership interest in the house to Lorraine. Therefore, Lorraine has a carryover basis of $410,000. Section 1041 provides that transfers of property between spouses or former spouses incident to a divorce are nontaxable transactions. Therefore, no change in basis results.

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017. On January 11, 2018, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $400,000 in a new office building on February 12, 2018, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected? a. $0; $400,000. b. $0; $320,000. c. $130,000; $400,000. d. $50,000; $320,000. e. None of these choices are correct.

d. $50,000; $320,000. Amount realized $450,000 Adjusted basis (320,000) Realized gain $130,000 Amount realized $450,000 Less: Reinvestment (400,000) Deficiency $ 50,000 Since the amount of the deficiency of $50,000 is less than the realized gain of $130,000, the recognized gain is $50,000. The basis of the new building is calculated as follows: FMV $400,000 Less: Postponed gain (unrealized gain - recognized gain) (80,000) Adjusted basis $320,000

Inez owns an automobile which she uses for personal use. Her adjusted basis is $40,000 (i.e., the original cost). The car is worth $24,000. Which of the following statements is correct? a. If Inez exchanges the car for another car worth $24,000, her realized loss of $16,000 is not recognized. b. If the car is stolen in a Federally declared disaster area and it is uninsured, Inez may be able to recognize part of her realized loss of $24,000. c. If Inez sells the car for $24,000, her realized loss of $16,000 is not recognized. d. All of these choices are correct. e. None of these choices are correct.

d. All of these choices are correct. A realized loss from the sale, exchange, or condemnation of personal use assets (e.g., a personal residence or an automobile used only for personal purposes) is not recognized for tax purposes. An exception exists for certain casualty or theft losses from personal use assets. Personal casualty losses ("If the car is stolen in a Federally declared disaster area and it is uninsured, Inez may be able to recognize part of her realized loss of $24,000") can be deducted subject to a $100 floor and a 10%-of-AGI floor, if within a Federally declared disaster area.

Tripp, age 80 and in poor health, owns investment land with an adjusted basis of $50,000. He is considering transferring it to Helen, his niece. Regarding Helen's income tax position, should the transfer to her be by gift or by inheritance? (Assume neither gift tax nor estate tax would be due and that the property is not expected to change in value.) a. If the fair market value of the land is $10,000, the transfer should be neither by inheritance nor by gift. b. If the fair market value of the land is $50,000, the transfer can be either by gift or by inheritance (i.e., the tax consequences are the same). c. If the fair market value of the land is $200,000, the transfer should be by inheritance. d. All of these choices are correct. e. None of these choices are correct.

d. All of these choices are correct. The donee's basis for property received by gift is a carryover basis (i.e., $50,000). The beneficiary's basis for property received by inheritance is the fair market value at the date of death. "If the fair market value of the land is $200,000, the transfer should be by inheritance" is correct because Helen's basis will be stepped up to the $200,000. "If the fair market value of the land is $50,000, the transfer can be either by gift or by inheritance (i.e., the tax consequences are the same)" is correct because in either case Helen's basis will be $50,000. "If the fair market value of the land is $10,000, the transfer should be neither by inheritance nor by gift" is correct. Rather than transferring the land to Helen by gift or inheritance, Tripp should sell the land for $10,000 and generate a recognized loss of $40,000 ($10,000 - $50,000). The $10,000 in cash can be transferred

Raquel owns Pepper, Inc. stock (adjusted basis of $40,000) which she sells to Jacob, her brother, for its fair market value of $32,000. Fifteen months later, he sells it to Paula, a friend, for its fair market value of $39,000. Determine Raquel's recognized loss, Jacob's recognized gain or loss, and Paula's adjusted basis for the stock. Raquel's Recognized Loss; Jacob's Recognized Gain or Loss; Paula's Basis a.$-0- $7,000 $32,000 b.$8,000 $7,000 $39,000 c.$-0- $7,000 $39,000 d.$-0- $-0- $39,000 e. None of these choices are correct.

d.$-0- $-0- $39,000 Raquel's realized loss of $8,000 is disallowed because Jacob is a related party. Jacob has no recognized gain, calculated as follows: Amount realized $39,000 Adjusted basis (32,000) Realized gain $7,000 Less portion of Raquel's disallowed loss to reduce to $0 (7,000) Recognized gain $ -0- Paula's basis for the stock is her cost of $39,000.

Which of the following cannot qualify as a taxpayer's principal residence? a. House trailer. b. Motor home. c. "Off the grid" cabin in the woods. d. Houseboat. e. A lot that is not adjacent to residential property.

e. A lot that is not adjacent to residential property. An adjacent lot can qualify if it is regularly used by the owner as part of the residential property.

Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment? a. Taxpayer has unused general business credit carryovers. b. Taxpayer has suspended or current passive activity losses. c. Taxpayer has unused NOL carryovers. d. Taxpayer expects his or her effective tax rate to increase in the future. e. All of these choices are correct.

e. All of these choices are correct. any of these choices could motivate current recognition.

Shane sells property with an adjusted basis of $19,000 to his daughter for $12,000. His daughter subsequently sells the property to her brother for $12,000. Two years later, the brother sells the property to Channing, an unrelated party, for $21,000. What is the brother's recognized gain or loss on the sale of the property? a. $4,000. b. $2,000. c. $(2,000). d. $0. e. None of these choices are correct.

e. None of these choices are correct. Amount realized $21,000 Adjusted basis (12,000) Realized gain $ 9,000 Recognized gain $ 9,000 The right of offset under § 267 is available only to the original transferee (i.e., daughter in this case).

Samantha inherits a home on July 1, 2017, that had a basis in the hands of the decedent at death of $180,000 and a fair market value of $345,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for nine years, with an adjusted basis of $95,000 and move into the inherited home. On September 16, 2017, she sells the old residence for $490,000. Samantha incurs selling expenses and legal fees of $34,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $85,000. These additions are completed and paid for on November 1, 2017. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home? a. $111,000; $265,000. b. $0; $180,000. c. $361,000; $430,000. d. $361,000; $265,000. e. None of these choices are correct.

e. None of these choices are correct. Amount realized ($490,000 - $34,000) $456,000 Adjusted basis (95,000) Realized gain $361,000 § 121 exclusion (250,000) Recognized gain $111,000 The adjusted basis of the inherited residence is the fair market value at the date of the decedent's death, $345,000, increased by the capital expenditures of $85,000 for a total of $430,000.

Jared exchanges a kiln that is used in his business for another kiln. The old kiln had an adjusted basis of $5,000, and the new kiln has a fair market value of $30,000. What is Jared's recognized gain or loss and the basis of the new kiln? a. $0; $30,000. b. $0; $5,000. c. $25,000; $30,000. d. $25,000; $5,000. e. None of these choices are correct.

e. None of these choices are correct. Real property (or realty) includes rental buildings, office and store buildings, manufacturing plants, warehouses, and land. Code § 1031 now only applies to real property. Personal property no longer is like-kind property TCJA of 2017.

Each of the following can qualify as a taxpayer's principal residence except a(n): a. Motor home. b. House trailer. c. "Off the grid" cabin in the woods. d. Houseboat. e. None of these choices are correct.

e. None of these choices are correct. A residence does not have to be a house

amantha inherits a home on July 1, 2017, that had a basis in the hands of the decedent at death of $180,000 and a fair market value of $345,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for nine years, with an adjusted basis of $95,000 and move into the inherited home. On September 16, 2017, she sells the old residence for $490,000. Samantha incurs selling expenses and legal fees of $34,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $85,000. These additions are completed and paid for on November 1, 2017. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home? a. $111,000; $265,000. b. $0; $180,000. c. $361,000; $430,000. d. $361,000; $265,000. e. None of these choices are correct.

e. None of these choices are correct. Amount realized ($490,000 - $34,000) $456,000 Adjusted basis (95,000) Realized gain $361,000 § 121 exclusion (250,000) Recognized gain $111,000 The adjusted basis of the inherited residence is the fair market value at the date of the decedent's death, $345,000, increased by the capital expenditures of $85,000 for a total of $430,000.

Crane, a farmer, has the following events occur during the tax year. Which of the events qualifies as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)? a. She burns her barn because it is infested with termites. b. Her farm tractor is hauled to the city dump because it is worn out. c. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices. d. Landscaping around her home is destroyed by drought. e. None of these choices are correct.

e. None of these choices are correct. None of these choices satisfies the definition of an involuntary conversion.

Kimberly received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Kimberly subsequently sold the property for $45,000. What is the recognized gain or loss? a. $4,000. b. $5,000. c. $(11,000). d. $(5,000). e. None of these choices are correct.

e. None of these choices are correct. The gain basis for Kimberly is $50,000, and the loss basis is $40,000. Because the sales price is within this range, no gain or loss is recognized. In this case, the gift tax paid of $6,000 has no effect on the gain basis.

A taxpayer whose principal residence is destroyed in a fire can use either the § 121 (sale of residence gain exclusion) or § 1033 (involuntary conversion postponement of gain) provisions, but not both.

false The taxpayer initially can elect to exclude the amount of realized gain allowed under § 121. Then § 1033 can be used to postpone the remainder of the realized gain associated with a qualified replacement. By using § 121 first, the amount of the reinvestment needed under § 1033 is reduced.

If income-producing or business property is transferred to a related taxpayer and a loss is disallowed, the value of the loss is irrelevant.

false If income-producing or business property is transferred to a related taxpayer and a loss is disallowed, the related-party buyer's basis is equal to the amount paid (i.e., its cost). If the related-party buyer later sells the property and realizes a gain, the gain is reduced by the loss that was previously disallowed. This is the right of offset.

In a nontaxable exchange, the replacement property basis is fair market value.

false In a nontaxable exchange, the replacement property is assigned a carryover basis.

There is no time limit for acquiring replacement property following an involuntary conversion.

false In general, the taxpayer must acquire replacement property within a two-year period after the close of the taxable year in which gain is realized.

Any realized gain or loss on the transfer of investment property between spouses may be recognized and any property involved has a carryover basis.

false Section 1041 provides that transfers of property between spouses or former spouses incident to a divorce are nontaxable transactions. Therefore, no change in basis results.

The adjusted basis of property that is stolen is reduced by the amount of insurance proceeds received and increased by any recognized loss.

false The adjusted basis of property that is stolen is reduced by the amount of insurance proceeds received and by any recognized loss.

If Barnes & Noble stock increases in value during the tax year by $4,500, the amount realized is a positive $4,500.

false The amount realized from a sale or other disposition of property is a measure of the economic value received for property given up. Since the stock wasn't sold, there is no amount realized.

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

false The reverse is true.

To satisfy the functional use test, replacement property must be used by the owner-investor in a similar endeavor as the property it is replacing.

false This is the taxpayer use test.

Drew owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for Drew to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

true Drew can recognize the realized loss of $7,000 ($8,000 - $15,000) if she sells the stock. If Drew gives the stock to her niece, the niece's adjusted basis for loss will be $8,000 and the $7,000 loss will benefit neither Drew nor her niece. The same preference would exist if the recipient were a qualified charitable organization.

Exchanging a truck for a parking lot is not a like-kind exchange.

true For the like-kind exchange rules to apply, real estate can be exchanged only for other real estate.

The sale of old property and the purchase of new like-kind property may or may not count as a like-kind exchange.

true Generally, a pair of transactions does not count as an exchange, but if the two transactions are mutually dependent, the IRS may treat them as a like-kind exchange.

The wash sale rules do not apply to gains.

true The wash sale rule applies if a taxpayer sells or exchanges stock or securities at a loss and within 30 days before or after the date of the sale or exchange acquires substantially identical stock or securities.