ACCTG 5310 Tax Ch. 13
Ex 65 Aaron has owned and used his house as his principal residence since 2003. On January 31, 2017, Aaron moves to another state. Aaron rents his house to tenants from that date until April 18, 2019, when he sells it. Is Aaron eligible for the section 121 exclusion?
Aaron is eligible for the § 121 exclusion because he has owned and used the house as his principal residence for at least two of the five years preceding the sale.
Ex 11 Jane purchased a personal residence. The purchase price and the related closing costs were: Purchase price: $325,000 Recording costs: 140 Title fees and title insurance: 815 Survey costs: 225 Attorney's fees: 750 Appraisal fee: 250 Other relevant tax information for the house during the time Jane owned it includes: • Constructed a swimming pool for medical reasons. The cost was $20,000, of which $5,000 was deducted as a medical expense. • Added a solar heating system. The cost was $18,000. • Deducted home office expenses of $6,000. Of this amount, $5,200 was for depreciation. What is the adjusted basis of the house?
Purchase Price: $325,000 Recording costs: 140 Title fees and insurance: 815 Survey costs: 225 Attorney's fees: 750 Appraisal fee: 250 Swimming pool (20,000 - 5,000): 15,000 Solar heating system: 18,000 Less: Depreciation deducted on home office: (5,200) Adjusted basis: $354,980
Ex 69 Assume the same facts as in the previous example, but the selling price is $490,000. What's her recognized gain if she uses the section 121 exclusion?
Since the realized gain of $342,000 exceeds the § 121 exclusion amount of $250,000, Mandy's recognized gain is $92,000 ($342,000 - $250,000). Amount realized ($490,000 - 18,000): $472,000 adjusted basis: (130,000) Realized gain: 342,000 Section 121 exclusion: (250,000) Recognized gain: 92,000
Ex 37 During the current year, Stephanie exchanged her rental condo in Vail, worth $250,000 (basis of $325,000), plus $80,000 of cash for a rental condo in Malibu worth $330,000. Although Stephanie has a realized loss of $75,000 on this transaction [$330,000 amount realized - ($325,000 basis + $80,000 cash)], none of the loss is recognized since the transaction qualifies as a like-kind exchange. Would Stephanie be better off, in a tax sense, by going through with the exchange or should she sell the condo at a loss?
Stephanie would likely be better off for tax purposes by selling her Vail condo (and recognizing the loss) and then buying the Malibu property.
Ex 64 Charles lives in a townhouse that he rents from 2013 through January 17, 2017. On January 18, 2017, he purchases the townhouse. On February 1, 2018, due to a decline in health, Charles moves into his daughter's home. On May 25, 2020, while still living in his daughter's home, Charles sells his townhouse. Does Charles' sale qualify for the Section 121 exclusion?
The § 121 exclusion applies because Charles owned the townhouse for at least two years out of the five years preceding the sale (from January 19, 2017, until May 25, 2020)94 and he used the townhouse as his principal residence for at least two years during the five-year period preceding the sale [from May 25, 2015 (the beginning of the five-year window) until February 1, 2018].
Problem 53 Rod Clooney purchases Sian Mitchell's sole proprietorship for $990,000 on August 15, 2020. The assets of the business are: Asset: A/R Agnes's Adjusted basis: $70,000 FMV: $70,000 Asset: Inventory AB: 90,000 FMV: 100,000 Asset: Equipment AB: 150,000 FMV: 160,000 Asset: Furniture and fixtures AB: 95,000 FMV: 130,000 Asset: Building AB: 190,000 FMV: 250,000 Asset: Land AB: 25,000 FMV: 75,000 Total AB: 620,000 Total FMV: 785,000 A. Calculate Sian's realized and recognized gain. B. What's the capital/goodwill gain?
A. Realized gain 990,000 - 620,000 = 370,000 Recognized gain: 370,000 B. A/R = 0 gain Inventory = 10,000 gain Capital gain, equipment = 10,000 gain Furniture = 35,000 gain Building = 60,000 gain Land = 50,000 gain Total capital gain = 370,000 - 10,000 - 10,000 - 35,000 - 60,000 - 50,000 = 205,000 Inventory or A/R gain on sale has to be recognized as ordinary income The other assets are capital assets and can be capital gains to Sian
Problem 46 Liam owns a personal use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Liam's AGI is $100,000. Calculate the realized and recognized gain or loss if: a. Liam sells the boat for $35,000. b. Liam exchanges the boat for another boat worth $35,000.
A. Liam sells the boat for $35,000. $35,000 - 45,000 = ($10,000.00) realized loss $0 recognized loss. Can't recognize loss on a personal use item B. Liam exchanges the boat for another boat worth $35,000. $35,000 - $45,000 = ($10,000.00) realized loss Cannot recognize a realized loss on personal use items in a like-kind exchange. Also like-kind exchanges are only for real estate, not boats
Problem 39 On February 24, 2020, Allison's building, with an adjusted basis of $1,300,000 (and used in her trade or business), is destroyed by fire. On March 31, 2020, she receives an insurance reimbursement of $1,650,000 for the loss. Allison invests $1,550,000 in a new building and buys stock with the balance of insurance proceeds. Allison is a calendar year taxpayer. a. By what date must Allison make the new investment to qualify for the nonrecognition election? b. Assuming that the replacement property qualifies as similar or related in service or use, what are Allison's realized gain, recognized gain, and basis in the replacement building?
A. Dec 31, 2023 B. Realized gain $1,650,000 - $1,300,000 = $350,000.00 Recognized gain $1,650,000 - $1,550,000 = $100,000.00 recognized gain Basis in the replacement building $1,550,000 - (350,000 - 100,000) = $1,300,000.00
Problem 79 Mitchell, a calendar year taxpayer, is the sole proprietor of a fast-food restaurant. His adjusted basis for the building and the related land is $450,000. On March 12, 2020, state authorities notify Mitchell that his property is going to be condemned so that the highway can be widened. On June 20, Mitchell's property is officially condemned, and he receives an award of $625,000. Because Mitchell's business has been successful in the past, he would like to reopen the restaurant in a new location. a. What is the earliest date Mitchell can acquire a new restaurant and qualify for gain postponement? b. On June 30, Mitchell purchases land and a building for $610,000. Assuming that he elects the maximum postponement amount, what is his recognized gain? c. What is Mitchell's adjusted basis for the new land and building?
A. What is the earliest date Mitchell can acquire a new restaurant and qualify for gain postponement? March 12, 2020 B. On June 30, Mitchell purchases land and a building for $610,000. Assuming that he elects the maximum postponement amount, what is his recognized gain? $625,000 - 610,000 = $15,000.00 recognized gain $625,000 - 450,000 = $175,000.00 realized gain C. What is Mitchell's adjusted basis for the new land and building? $610,000 - (175,000 - 15,000) = $450,000.00
What's adjusted basis?
Adjusted basis of property disposed of is the property's original basis adjusted to the date of disposition
Ex 12 Return to the facts of The Big Picture on p. 13-1. Assume that Alice sells the boat, which she has held exclusively for personal use, for $23,000. Recall that her adjusted basis for the boat is $22,000. What's Alice's realized/recognized gain (loss)?
Alice records a realized and recognized gain of $1,000 ($23,000 - $22,000).
Ex 25 Return to the facts of The Big Picture on p. 13-1. Assume the same facts as in Example 24, except that the house's fair market value at the date of Paula's death was $260,000. What's Alice's basis?
Alice's basis for income tax purposes is $260,000. This is commonly referred to as a stepped-down basis.
Ex 24 Return to the facts of The Big Picture on p. 13-1. Alice inherited property from Paula, who died recently. At the date of death, Paula's basis for the property Alice inherited was $275,000. The house's fair market value at the date of death was $475,000. What's Alice's basis on the home?
Alice's basis for income tax purposes is $475,000. This commonly is referred to as a stepped-up basis.
Ex 30 Return to the facts of The Big Picture on p. 13-1. Alice owned 100 shares of Green Corporation stock (basis of $20,000). She sold 50 shares for $8,000. Ten days later, she purchased 50 shares of the same stock for $7,000. Is the loss/gain from Alice's initial sale recognized? What's the basis of the newly acquired stock?
Alice's realized loss of $2,000 ($8,000 amount realized - $10,000 basis of 50 shares) is not recognized because it resulted from a wash sale. Alice's basis in the newly acquired stock is $9,000 ($7,000 purchase price + $2,000 unrecognized loss from the wash sale)
Ex 72 Debra and Raji are engaged and buy a house (sharing the mortgage payments) and live in it as their personal residence. Eighteen months after the purchase, they cancel their wedding plans, and Raji moves out of the house. Because Debra cannot afford to make the payments alone, they sell the house. Does this situation qualify as an exception to the 2-year rule?
Although the sale does not fit under the safe harbor events, the broken engagement is an unforeseen event; it qualifies under the "facts and circumstances" provision.
Ex 70 Margaret sells her personal residence (adjusted basis of $150,000) for $650,000. She has owned and lived in the residence for six years. Her selling expenses are $40,000. Margaret is married to Ted, and they file a joint return. Ted has lived in the residence since they were married two and one-half years ago. What is the recognized gain/loss?
Amount realized ($650,000 - $40,000): $610,000 Adjusted basis: (150,000) Realized gain: $460,000 Section 121 exclusion: (460,000) Recognized gain: $0 Because the realized gain of $460,000 is less than the available § 121 exclusion amount of $500,000, no gain is recognized.
What's amount realized?
Amount realized from a sale or other disposition is a measure of the economic value received for property given up. The sum of any money received (which includes any debt relief) plus the fair market value of other property received
Problem 43 Anne sold her home for $290,000 in 2020. Selling expenses were $17,400. She purchased it in 2014 for $200,000. During the period of ownership, Anne had done the following: Deducted $50,500 office-in-home expenses, which included $4,500 in depreciation. (Refer to text Section 9-6a.) Deducted a casualty loss in 2016 for residential trees destroyed by a hurricane (her county was declared a Federal disaster area). The total loss was $19,000 (after the $100 floor and the 10%-of-AGI floor), and Anne's insurance company reimbursed her for $13,500. (Refer to text Section 7-3.) Paid street paving assessment of $7,000 and added sidewalks for $8,000. Installed an elevator for medical reasons. The total cost was $20,000, and Anne deducted $13,000 as medical expenses. (Refer to text Section 10-1b. What is Anne's realized gain?
Amount realized: $290,000 - 17,400 = $272,600.00 In-home office expenses: $50,500 - 4,500 = $46,000.00 Depreciation: 4,500 Casualty loss of: 19,000 - 13,500 = 5,500 Insurance was 13,500 Street pavement improvements: 15,000 Elevator for medical reasons: 20,000 - 13,000 = 7,000 Deduction for medical expense: 13,000 Adjusted basis after all the improvements: 200,000 - 4,500 - 5,500 - 13,500 + 15,000 + 7,000 = 198,500 Amount realized - adjusted basis = realized gain 272,600 - 198,500 adjusted basis = 74,100 realized gain
Ex 22 Assume the same facts as in Example 21, except that Cliff sells the stock for $8,000. What is the realized gain (loss)?
Application of the gain basis rule produces a loss of $2,000 ($8,000 - $10,000). Application of the loss basis rule produces a gain of $1,000 ($8,000 - $7,000). Because the amount realized is between the gain basis and the loss basis, Cliff recognizes neither a gain nor a loss.
Ex 17 Rocky sells his business to Renata. An independent appraisal indicates that the business assets, other than goodwill, have the following fair market values: Inventory: $ 50,000 Building: 500,000 Land: 200,000 After negotiations, Rocky and Renata agree on a sales price of $1,000,000. Apply the residual method with respect to goodwill. What is the allocation of the $1,000,000 purchase price?
Applying the residual method with respect to goodwill results in the following allocation of the $1,000,000 purchase price: Inventory: $ 50,000 Building: 500,000 Land: 200,000 Goodwil: 250,000 The residual method requires that the excess of the purchase price over the fair market value of the assets other than goodwill ($1,000,000 $750,000 $250,000)25 be allocated to goodwill.
Ex 33 At a time when his personal residence (adjusted basis of $140,000) is worth $150,000, Keith converts one-half of it to rental use. For simplicity, assume that the property is not covered by MACRS, will be depreciated using the straight-line method, has an estimated useful life of 20 years, and has no salvage value. After renting the converted portion for five years, Keith sells the property for $144,000. All amounts relate only to the building; assume that the land has been accounted for separately. What's the gain (loss) on sale of the personal use property? What's the gain (loss) on sale of the rental portion?
As a result, annual depreciation will be $3,500 ($70,000/20 years) Keith has a $2,000 realized gain from the sale of the personal use portion of the residence and a $19,500 realized gain from the sale of the rental portion. Personal Use: Original basis for gain and loss - adjusted basis on the date of conversion (FMV is greater than adjusted basis) - $70,000 Depreciation - five years -$0 Adjusted basis - date of sale - $70,000 Amount realized - $72,000 Realized gain - $2,000 Rental: Original basis for gain and loss - adjusted basis on the date of conversion (FMV is greater than adjusted basis) - 70,000 Depreciation - five years - (17,500) Adjusted basis - date of sale - 52,500 Amount realized - 72,000 Realized gain - 19,500
Ex 71 Assume the same facts as in Example 67, except that in March 2020, Mike's employer transfers him to a job in another state that is 400 miles away. Would the sale of the second sale qualify for the section 121 exclusion?
As a result, the sale of the second residence and the purchase of the third residence were due to relocation of employment. Consequently, the § 121 exclusion is partially available on the sale of the second residence.
Ex 4 Barry owns property on which there is a mortgage of $20,000. He sells the property to Cole for $50,000 cash and Cole's agreement to assume the mortgage. What's Barry's amount realized from the sale?
Barry's amount realized from the sale is $70,000 ($50,000 cash $20,000 debt relief)
Ex 31 Assume the same facts as Example 30, except that instead of purchasing 50 shares of Green Corporation stock for $7,000 ($140 per share), Alice purchased only 40 shares of the stock for $5,600 (40 shares x $140 per share). Is the loss recognized? What's the basis on the newly purchased shares?
Because Alice replaced only 40 of the 50 shares previously sold at a loss, only 80% (40 ÷ 50) of the $2,000 realized loss is disallowed ($1,600; 80% x $2,000). As a result, Alice will recognize a $400 loss ($2,000 x 20%) and will have a basis of $7,200 in the 40 shares of Green Corporation she purchased ($5,600 purchase price + $1,600 disallowed loss).
Ex 67 Mike sells his principal residence (the first residence) in June 2019 for $150,000 (realized gain of $60,000). He then buys and sells the following (all of which qualify as principal residences): Second residence: purchased July 2019 @ $160,000 Sold April 2020 @ $180,000 Third residence: purchased May 2020 @ $200,000 Does section 121 apply to the second sale? What is the realized gain (loss) on sale?
Because multiple sales have taken place within a period of two years, § 121 does not apply to the sale of the second residence. As a result, the realized gain of $20,000 [$180,000 (selling price) - $160,000 (purchase price)] must be recognized.
Ex 63 Sarah purchased a home in San Diego in May 2005 and lived in it until she took a new job in Los Angeles on January 1, 2016. From January 2016 until she sold the house on July 31, 2020, she only used the home occasionally since she lived in an apartment near her job in downtown Los Angeles. What is the timeframe to look at for the house if Sarah wants to follow section 121? Does she qualify for section 121?
Because the house was sold on July 31, 2020, the five-year window runs from August 1, 2015, to the date of sale. In determining whether the § 121 exclusion is available, Sarah meets the ownership test because she owned the house for two of the five years prior to its sale. However, she fails the use test. During the five-year window, she used the house as her principal residence for only five months (from August 1, 2015, to December 31, 2015).
Ex 57 Lupe's property, with an adjusted basis of $20,000, is condemned by the state. Lupe receives property with a fair market value of $50,000 as compensation for the property taken. What's Lupe's recognized gain? What's the adjusted basis on the new property?
Because the nonrecognition of realized gain is mandatory for direct conversions, Lupe's realized gain of $30,000 is not recognized and the basis of the replacement property is $20,000 (adjusted basis of the condemned property).
Ex 18 Susan owns 100 shares of Sparrow Corporation common stock for which she paid $1,100. She receives a 10% common stock dividend, giving her a new total of 110 shares. What is the share price before and after the stock dividend?
Before the stock dividend, Susan's basis was $11 per share ($1,100/100 shares) dividend is $10 ($1,100/110 shares).
Ex 26 George, age 58, was entitled to a salary payment of $18,000 and a bonus of $20,000 at the time of his death. In addition, George had been contributing to a traditional IRA for over 20 years. The IRA has a basis of $83,000 (due to some nondeductible contributions over the years) and a current value of $560,000. George's estate collects the salary and bonus payments, and George's wife (his only beneficiary) cashes in the IRA. What's the estate's IRD and what's the wife's IRD?
Both the estate and George's wife have income in respect of a decedent (IRD) and must include ordinary income in their computation of taxable income for the year. The estate has IRD of $38,000 (salary of $18,000 + bonus of $20,000) proceeds $83,000 basis), and George's wife has IRD of $477,000 ($560,000 proceeds - $83,000 basis).
Ex 2 Carl sells Swan Corporation stock with an adjusted basis of $3,000 for $5,400. What his gain/loss? What if he sold the stock for $1,750? What's his gain/loss?
Carl's realized gain is $2,400 ($5,400 - $3,000). If Carl had sold the stock for $1,750, he would have had a realized loss of $1,250 ($1,750 - $3,000).
Ex 21 Burt purchased stock in 2018 for $10,000. In 2019, he gave the stock to his son, Cliff, when the fair market value was $7,000. Cliff later sells the stock for $6,000. What's Cliff's basis? What the realized gain (loss)?
Cliff's basis is $7,000 (fair market value is less than donor's adjusted basis of $10,000), and the realized loss from the sale is $1,000 ($6,000 amount realized - $7,000 basis).
Ex 23 Vito gave a machine (a MACRS 5-year asset) to Tina in 2020. At that time, the adjusted basis was $32,000 (cost of $40,000 - accumulated depreciation of $8,000), and the fair market value was $26,000. No Federal gift tax was paid. At the end of 2020, what's the gain basis and what's the loss basis?
During 2020, Tina deducts depreciation (cost recovery) of $6,400 ($32,000 x 20%). At the end of 2020, Tina's gain basis and loss basis are: Gain basis: Donor's basis or FMV - $32,000 Less: Depreciation (cost recovery) - (6,400) Equals: $25,600 Loss Basis: Donor's basis or FMV - $26,000 Less: Depreciation (cost recovery) - (6,400) Equals: $19,600
Ex 40 Assume the same facts as in the previous example, except that Fran's land is worth $21,000 (not $19,000). Under these circumstances, Fran gives Emily cash of $3,000 to make up the difference. What's Emily's recognized gain?
Emily's recognized gain is $3,000, the lesser of the realized gain of $4,000 ($24,000 amount realized - $20,000 adjusted basis) or the fair market value of the boot received of $3,000.
Ex 39 Emily and Fran exchange land, and the exchange qualifies as like kind. Because Emily's land (adjusted basis of $20,000) is worth $24,000 and Fran's land has a fair market value of $19,000, Fran also gives Emily cash of $5,000. What's Emily's recognized gain?
Emily's recognized gain is $4,000, the lesser of the realized gain ($24,000 amount realized - $20,000 adjusted basis) or the fair market value of the boot received ($5,000).
Ex 66 Benjamin sells his former principal residence on August 16, 2020. He had purchased it on April 1, 2012, and lived in it until July 1, 2019, when he converted it to rental property. Does Benjamin qualify for section 121 exclusion?
Even though the property is rental property on August 16, 2020, rather than Benjamin's principal residence, the sale qualifies for the § 121 exclusion. During the five-year period from August 16, 2015, to August 16, 2020, Benjamin owned and used the property as his principal residence for at least two years.
Ex 19 Fran owns 100 shares of Cardinal Corporation common stock for which she paid $1,000. She receives a nontaxable stock dividend of 50 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stock dividend are $30 a share for common stock and $40 a share for preferred stock. What is the FMV of common and preferred? What is the basis per share for the common stock and the preferred stock?
Fair market value of common ($30 x 100 shares): $3,000 Fair market value of preferred ($40 x 50 shares): 2,000 Total: 5,000 Basis of common (3/5 x $1,000): 600 Basis of preferred (2/5 x $1,000): 400 The basis per share for the common stock is $6 ($600/100 shares). The basis per share for the preferred stock is $8 ($400/50 shares).
Problem 32 Arianna's personal residence has an adjusted basis of $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna's gain basis? What is her loss basis?
Gain basis is $230,000 less any depreciation Loss basis is 210,000 less any depreciation
Ex 16 Harry purchases a building and land for $800,000. Because of the depressed nature of the industry in which the seller was operating, Harry was able to negotiate a favorable purchase price. Appraisals of the individual assets indicate that the fair market value of the building is $600,000, and that of the land is $400,000. What's Harry's basis for the building and land?
Harry's basis for the building is $480,000[($600,000/$1,000,000) x $800,000] land is $320,000[($400,000/$1,000,000) x $800,000].
Ex 32 Diane's personal residence has an adjusted basis of $175,000 and a fair market value of $160,000. Diane converts the personal residence to rental property. What's the basis for loss? What's the basis for gain?
Her basis for loss is $160,000 (lower of $175,000 adjusted basis and fair market value of $160,000). The $15,000 decline in value is a personal loss and can never be recognized for tax purposes. Diane's basis for gain is $175,000.
Ex 68 Mandy, who is single, sells her personal residence (adjusted basis of $130,000) for $290,000. She has owned and lived in the residence for three years. Her selling expenses are $18,000. Three weeks prior to the sale, Mandy paid a carpenter and a painter $1,000 to make some repairs and paint two rooms. What's her recognized gain?
Her recognized gain is $0. Amount Realized ($290,000 - 18,000): $272,000 Adjusted basis: (130,000) Realized gain: 142,000 Section 121 exclusion: (142,000) Recognized gain: $0 Since the available § 121 exclusion of $250,000 exceeds Mandy's realized gain of $142,000, her recognized gain is $0.
Ex 36 During the current year, Andy exchanged 40 acres of unimproved land in Illinois (fair market value $200,000, basis $70,000) for 10 acres of unimproved land in California (fair market value $200,000). Although Andy has a realized gain of $130,000 on this transaction ($200,000 amount realized - $70,000 basis), none of the gain is recognized; the transaction qualifies as a like-kind exchange. Andy's basis in the new property is $70,000. This carryover basis reflects the realized gain that is deferred ($200,000 California property fair market value - $130,000 gain deferred). The like-kind exchange rules acknowledge that Andy—after the exchange—would not have the wherewithal to pay tax if the realized gain were recognized. If Andy were to sell the California property for its market value, what would be his realized and recognized gain?
If Andy were to sell the California property for its market value, he would have a realized and recognized gain of $130,000.
Ex 27 Andrew and LaTonya own, as community property, 200 shares of Biltmore Company stock acquired in 1991 for $100,000. Andrew dies in 2020, when the securities are valued at $300,000. One-half of the Biltmore stock is included in Andrew's estate. If LaTonya inherits Andrew's share of the community property, what's the basis for gain or loss?
If LaTonya inherits Andrew's share of the community property, the basis for gain or loss is $300,000: LaTonya's one-half of the community property (stepped up from $50,000 to $150,000 due to Andrew's death) - $150,000 Andrew's one-half of the community property (stepped up from $50,000 to $150,000 due to inclusion in his gross estate) - 150,000 LaTonya's new basis: 300,000
Ex. 14 Wade buys land from his employer for $10,000 on December 30. The fair market value of the land is $15,000. What will Wade include in his gross income on the year of purchase?
In the year of purchase, Wade must include in his gross income the $5,000 difference between the cost and the fair market value of the land. The bargain element represents additional compensation to Wade. His basis for the land is $15,000, the land's fair market value.
Ex 52 Refer to the facts of Example 49, but assume that Jason had only partial coverage on his boat and his insurance settlement is only $50,000. What's Jason's loss? Is his loss deferred?
In this case, Jason has a loss of $28,000, computed as follows: Amount realized (insurance proceeds): $ 50,000 Less: Adjusted basis: (78,000) Realized loss: ($ 28,000) No tax deferral applies; Jason's realized loss of $28,000 is recognized.
Ex 50 Refer to the facts of Example 49, and assume that Jason buys a new boat for $180,000. He uses the entire insurance settlement as part of the purchase. What's Jason's realized gain?
In this case, Jason's $97,000 realized gain is deferred, and the basis of his new boat must reflect that deferral. As a result, his new boat's basis is $83,000 ($180,000 cost - $97,000 deferred gain)
Ex 49 Jason operates a charter fishing business in Panama City, Florida, taking customers out in the Gulf of Mexico on daylong fishing trips. Unfortunately, his boat was completely destroyed when Hurricane Michael hit the Florida coast. His boat had a basis of $78,000 ($120,000 cost - $42,000 of accumulated depreciation). Fortunately, Jason had marine insurance (which included a replacement cost rider). He filed an insurance claim shortly after his boat was destroyed and received $175,000 in insurance proceeds three weeks later. What's Jason's realized gain?
Jason has a realized gain of $97,000, computed as follows: Amount realized (insurance proceeds): $175,000 Less: Adjusted basis: (78,000) Realized gain: 97,000 Jason can defer the entire realized gain, provided that he uses all of the insurance proceeds to purchase a new boat.
Ex 51 Continuing with the facts of Example 49, assume that Jason is able to negotiate an excellent price for his new boat. In fact, he is able to replace his old boat for only $168,000 and uses the $7,000 remaining from the insurance settlement to pay for other business expenses. What's Jason's recognized gain?
Jason recognizes a gain of $7,000, the difference between the $175,000 insurance settlement and the amount he paid for the new boat ($168,000; the amount of the insurance proceeds he reinvested in replacement property). The balance of the realized gain is deferred, and the basis of his new boat must reflect that deferral. As a result, his new boat's basis is $78,000 ($168,000 cost - $90,000 deferred gain)
Ex 48 Jill Rodriguez and Rick Thompson exchange real estate investments. Jill gives up property with an adjusted basis of $250,000 (fair market value of $420,000) that is subject to a mortgage of $80,000 (assumed by Rick). In return for this property, Jill receives property with a fair market value of $340,000 (Rick's adjusted basis in the property is $200,000). What are Jill's and Rick's realized and recognized gains and their basis in the like-kind property received?
Jill: realized gain (loss): $340,000 + $80,000 - $250,000 = $170,000 Boot received: $80,000 debt relief Recognized gain/loss: $80,000 Compute basis for new property (other than cash): $250,000 + 0 + 80,000 - 80,000 - 0 = $250,000 Rick: Realized gain (loss): $420,000 - 200,000 - 80,000 = $140,000 Boot received : $0 Recognized gain (loss): $0 Compute basis for new property (other than cash): $200,000 + 80,000 + 0 - 0 - 0 = $280,000
Ex 20 Melissa purchased stock in 2019 for $10,000. In 2020, she gave the stock to her son, Joe, when the fair market value was $15,000. Joe subsequently sells the property for $18,000. What's Joe's basis? What's Joe's realized gain? What's Joe's realized gain if he sold the stock for $12,000? What if he sold the stock for $2,000? What if he sold the stock for $7,000?
Joe's basis is $10,000, and he has a realized gain of $8,000 ($18,000 - $10,000). If Joe sold the stock for $12,000, he would have a realized gain of $2,000 ($12,000 - $10,000). If Joe sold the stock for $7,000, he would have a realized loss of $3,000 ($7,000 - $10,000)
Ex 7 Refer back to Example 3. The machine Juan sold was acquired four years ago for $100,000. It was 7-year MACRS property, and Juan did not take either an immediate expense deduction (§ 179) or bonus depreciation on the property. What's Juan's adjusted basis? What's Juan's realized gain? Ex 3: Juan sells a machine used in his landscaping business to Peter for $20,000 cash plus four acres of property that Peter owns in a nearby town with a fair market value of $36,000. Juan's amount realized on this sale is $56,000 ($20,000 cash $36,000 land)
Juan's adjusted basis is computed as follows: Original cost: $100,000 Cost Recovery: Year 1 ($100,000*0.1429) = $14,290 Year 2 ($100,000*0.2449) = 24,490 Year 3 ($100,000*0.1749) = 17,490 Year 4 ($100,000*1249*0.5) = 6,245 total cost recovery = (62,515) Adjusted basis = 100,000 - 62,515 = 37,485 Since Juan's amount realized on the sale was $56,000, his realized gain is $18,515 Amount realized: $56,000 Adjusted Basis: (37,485) Realized gain (loss): $18,515
Ex 3 Juan sells a machine used in his landscaping business to Peter for $20,000 cash plus four acres of property that Peter owns in a nearby town with a fair market value of $36,000. What's Juan's amount realized on the sale?
Juan's amount realized on this sale is $56,000 ($20,000 cash + $36,000 land)
Ex 34 Assume the same facts as in the previous example, except that the fair market value on the date of conversion is $130,000 and the sales proceeds are $90,000. What's the realized gain (loss) for personal use and rental?
Keith has a $25,000 realized loss from the sale of the personal use portion of the residence and a $3,750 realized loss from the sale of the rental portion. These losses are computed as follows: Personal Use: Original basis for gain and loss - adjusted basis on the date of conversion (FMV is less than adjusted basis) - $70,000 Depreciation - $0 Adjusted basis - 70,000 Amount realized - 45,000 Realized loss - ($25,000) Renal: Original basis for gain and loss - adjusted basis on the date of conversion (FMV is less than adjusted basis) - $65,000 Depreciation - (16,250) Adjusted basis - 48,750 Amount realized - 45,000 Realized loss - ($3,750)
Ex 28 Assume the same facts as in the previous example, except that the property is jointly held by Andrew and La Tonya, who reside in a common-law state. Andrew purchased the property and made a gift of one-half of the property to LaTonya when the stock was acquired. No Federal gift tax was paid. Only one-half of the Biltmore stock is included in Andrew's estate. What's LaTonya's basis?
LaTonya's basis for determining gain or loss in the excluded half is not adjusted upward for the increase in value to date of death. As a result, LaTonya's basis is $200,000: LaTonya's one-half of the jointly held property (carryover basis of $50,000) - $50,000 Andrew's one-half of the jointly held property (stepped up from $50,000 to $150,000 due to inclusion in his gross estate) - $150,000 LaTonya's new basis: $200,000
Ex 1 Lori owns Tan Corporation stock that she bought for $3,000. The stock has appreciated in value and is now worth $5,000. Does Lori have unrealized gain/loss? Does Lori have realized gain/loss?
Lori has no realized gain because a change in value is not an identifiable event for tax purposes. Here, Lori has an unrealized gain of $2,000 ($5,000 - $3,000). The same is true if the stock had declined in value to $1,000. Because there was no identifiable event, there is no realized loss. Here, Lori would have an unrealized loss of $2,000 ($1,000 - $3,000).
Ex 9 How would your answer to Example 8 change if the basis of the truck was $6,000, its fair market value was $9,000, and Marvin received a $9,000 insurance settlement? What's the casualty gain/loss? What's the adjusted basis? Ex 8 An insured truck that Marvin used in his trade or business is destroyed in an accident. At the time of the accident, the adjusted basis of the truck was $8,000, and its fair market value was $6,500. Marvin receives insurance proceeds of $6,500.
Now Marvin has a casualty gain of $3,000 ($9,000 insurance proceeds - $6,000 adjusted basis). The truck's adjusted basis is increased by the $3,000 casualty gain and is reduced by the $9,000 of insurance proceeds received ($6,000 basis before casualty + $3,000 casualty gain - $9,000 insurance proceeds = $0 adjusted basis).
Problem 42 On August 31, 2019, Harvey and Ling, who file a joint return and live in Charleston, South Carolina, sell their personal residence, which they have owned and lived in for 10 years. The realized gain of $292,000 was excluded under § 121. They purchased another personal residence in Charleston for $480,000 on September 1, 2019. However, in 2020, Harvey's employer transfers him to Houston, Texas. The couple sells the Charleston home on February 28, 2020, and purchases a new home in Houston. The realized gain on the second sale is $180,000. What is Harvey and Ling's recognized gain on the second sale?
Out of the 24 months to fulfill the next time limit, 6 months were spent in the new home 6/24 = 0.25 0.25*500,000 = 125,000 this is how much exclusion they qualify for. Since the full exclusion for MFJ is $500,000 180,000 - 125,000 = 55,000 recognized gain
Ex 29 Pedro sells business property with an adjusted basis of $50,000 to his daughter, Josefina, for its fair market value of $40,000. Is Pedro's gain/loss recognized? • How much gain does Josefina recognize if she sells the property for $52,000? • How much gain does Josefina recognize if she sells the property for $48,000? • How much loss does Josefina recognize if she sells the property for $38,000?
Pedro's realized loss of $10,000 ($40,000 - $50,000) is not recognized. Josefina recognizes a $2,000 gain. Her realized gain is $12,000 ($52,000 less her basis of $40,000), but she can offset Pedro's $10,000 loss against the gain. Josefina recognizes no gain or loss. Her realized gain is $8,000 ($48,000 less her basis of $40,000), but she can offset $8,000 of Pedro's $10,000 loss against the gain. The balance of Pedro's disallowed loss ($2,000) disappears and cannot be used. Note that Pedro's loss can only offset Josefina's gain. It cannot create a loss for Josefina. Josefina recognizes a $2,000 loss, the same as her realized loss ($38,000 less $40,000 basis). Pedro's loss does not increase Josefina's loss. His loss only can offset a gain. Because Josefina has no realized gain, Pedro's loss cannot be used and never is recognized. Note that if the property was a personal use asset (not business), her $2,000 loss would be personal and would not be recognized.
Ex 46 Vicki exchanged a building used in her business for a parcel of unimproved land on which she plans to construct a new building. Her building has a fair market value of $1,200,000 and an adjusted basis of $400,000. The land she acquires has a fair market value of $900,000, and she will receive cash of $300,000 as part of the exchange. What is Vicki's realized and recognized gain or loss, and what is her basis in the land she receives [using both the § 1031(d) approach and the simplified method]?
Realized gain: $900,000 + 300,000 - 400,000 = 800,000 Boot received: cash = $300,000 Recognized gain: lesser of realized gain or boot: $300,000 Basis of new land (section 1031(d)): 400,000 + 0 + 300,000 - 300,000 - 0 = $400,000 Basis of new land (simplified method): $900,000 - (800,000 - 300,000) = $400,000
Ex 47 Assume the same facts as Example 46, except that Vicki's building has a fair market value of $300,000 and she provides $600,000 cash to the seller as part of the exchange.
Realized loss: 900,000 - 400,000 - 600,000 = (100,000) Boot received: $0 Recognized loss: $0 Basis of new land (section 1031(d): 400,000 + 600,000 + 0 - 0 - 0 = 1,000,000 Basis of new land (simplified method): 900,000 - (-100,000 + 0) = 1,000,000
Ex 53 The government condemns a portion of Ron's farmland to upgrade a highway for driverless vehicles. Because the project denies his cattle access to a pond and some grazing land, Ron receives severance damages in addition to the condemnation proceeds for the land taken. How does the severance impact Ron's basis for the property if the severance is less than the adjusted basis? What if the severance is more than the adjusted basis?
Ron must reduce the basis of the property by the amount of the severance damages. If the amount of the severance damages received exceeds the adjusted basis, Ron recognizes gain.
Ex 43 Assume the same facts as in the previous example, except that Sarah transfers land worth $30,000 (adjusted basis of $36,000) and boot worth $45,000 (adjusted basis of $27,000). What's Sarah's net gain on the exchange? What the realized gain (loss) on the like-kind property? Is it deferred or recognized? What's the realized gain (loss) on the non-like-kind property? Is it deferred or recognized?
Sarah's net gain on this exchange is $12,000 [$75,000 amount realized - adjusted basis of $63,000 ($36,000 + $27,000)]. But she is transferring two pieces of property: land (like-kind property) with a built-in realized loss of $6,000 ($30,000 fair market value - $36,000 adjusted basis) and non-like-kind property (boot) with a built-in realized gain of $18,000 ($45,000 fair market value - $27,000 adjusted basis). In this case, the $6,000 realized loss on the like-kind property is deferred (not recognized) and the $18,000 realized gain on the non-like-kind property is recognized. In other words, the realized loss on the like-kind property cannot be used to offset the realized gain on the boot given up as part of the transaction.
Ex 42 Sarah and Gary exchange land in a like-kind exchange. Sarah receives land with a fair market value of $75,000 and transfers land worth $63,000 (adjusted basis of $45,000) and cash of $12,000. What's Sarah's realized and recognized gain?
Sarah's realized gain is $18,000 ($75,000 amount realized - $45,000 adjusted basis - $12,000 cash). However, none of Sarah's realized gain is recognized
Ex 6 Ridge sells an office building and the associated land on October 1, 2020. Under the terms of the sales contract, Ridge is to receive $600,000 in cash. The purchaser is to assume Ridge's mortgage of $300,000 on the property. To assist the purchaser, Ridge agrees to pay $15,000 of the purchaser's closing costs (a "closing cost credit"). The broker's commission on the sale is $45,000. What's the amount realized by Ridge?
Selling price: Cash - $600,000 Mortgage assumed by purchaser - 300,000 Total selling price: $900,000 Less: Broker's commission - $45,000 Closing cost credit provided by Ridge - 15,000 total: 900,000 - 45,000 - 15,000 = $840,000
Ex 59 Return to the facts of The Big Picture on p. 13-1. Assume the same facts as in the previous example, except that Alice receives only $45,000 of insurance proceeds. Her original building has an adjusted basis of $50,000. She buys a new building for $80,000. What's her realized gain (loss)? What's her recognized gain (loss)? What's the basis of the new building?
She has a realized and recognized loss of $5,000. The basis of the new building is the building's cost of $80,000.
Ex 13 Return to the facts of The Big Picture on p. 13-1. Assume that Alice sells the boat in Example 12 for $20,000. Recall that her adjusted basis for the boat is $22,000. What's Alice's realized/recognized gain (loss)?
She records a realized loss of $2,000 ($20,000 - $22,000), but the loss is not recognized because the boat is a personal use asset.
Ex 45 Assume the same facts as in the previous example, except that the building has an adjusted basis of $480,000 and a fair market value of only $380,000. Jaime receives land with a fair market value of $380,000. What's the realized loss? Is it recognized or deferred? What's the basis in the new land? If later, the land is sold for its FMV of $380,000, what happens?
The $100,000 realized loss is deferred. The basis in the newly acquired land is $480,000 (fair market value of $380,000 + $100,000 postponed loss on the building). If the land later is sold for its fair market value of $380,000, the $100,000 postponed loss is recognized.
Ex 73 On October 1, 2019, Rich and Audrey, who file a joint return and live in Chicago, sell their personal residence, which they have owned and lived in for eight years. The realized gain of $325,000 is excluded under § 121. They purchase another personal residence for $525,000 on October 2, 2019. Audrey's employer transfers her to the Denver office in August 2020. Rich and Audrey sell their Chicago residence on August 2, 2020, and they purchase a residence in Denver shortly thereafter. The realized gain on the sale is $300,000. Can they use the section 121 exclusion? What's the recognized gain on the sale?
The $325,000 gain on the first Chicago residence is excluded under § 121. The sale of the second Chicago residence is within the two-year window of the prior sale, but because it resulted from a change in employment, Rich and Audrey can qualify for partial exclusion treatment. Realized gain: $300,000 Section 121 exclusions: 10/24 months x $500,000 = (208,333) Recognized gain: 91,667
Ex 60 Tom and Eileen Atwood bought their home in 2011 for $525,000 and have used it as their principal residence since that time. In July 2020, they sell their home for $670,000. Do the Atwoods have a gain or loss? It is recognized on their taxes? What if the Atwoods sold their home for $500,000? Do they have a gain or a loss? Is it recognized on their taxes?
The Atwoods have a realized gain of $145,000 on the sale ($670,000 - $525,000), and the entire gain is excluded as a result of § 121. In this case, since their home is a personal use asset, they would have a $25,000 realized loss that would not be recognized.
Ex 8 An insured truck that Marvin used in his trade or business is destroyed in an accident. At the time of the accident, the adjusted basis of the truck was $8,000, and its fair market value was $6,500. Marvin receives insurance proceeds of $6,500. What is the amount of casualty loss? What's the new adjusted basis?
The amount of the casualty loss is $1,500 ($6,500 insurance proceeds - $8,000 adjusted basis). The truck's adjusted basis is reduced by the $1,500 casualty loss and the $6,500 of insurance proceeds received ($8,000 basis before casualty - $1,500 casualty loss - $6,500 insurance proceeds = $0 adjusted basis).
Ex 61 Mitch graduates from college and moves to Boston, where he is employed. He decides to rent an apartment in Boston because of its proximity to his office. He purchases a beach condo in the Cape Cod area that he occupies most weekends. Mitch does not intend to live at the beach condo except on weekends. Which property is Mitch's principle residence?
The apartment in Boston is his principal residence.
Ex 15 Polly purchases 100 shares of Olive Corporation stock on July 1, 2018, for $5,000 ($50 a share) and another 100 shares of Olive stock on July 1, 2019, for $6,000 ($60 a share). She sells 50 shares of the stock on January 2, 2020. What is the cost the stocks sold if Polly doesn't know which stocks were sold? What is the cost if she knows that the stocks she sold were purchased in 2019?
The cost of the stock sold, assuming that Polly cannot adequately identify the shares, is $50 a share, or $2,500. If Polly was able to specifically identify the shares sold as the shares purchased in 2019, the cost basis would be $60 a share and the holding period (see text Section 14-4) would be short term.
Ex 56 Assume the same facts as in Example 55. What's the earliest date that Megan can replace the warehouse?
The earliest date that Megan can replace the warehouse is November 1, 2019, which is the date of an official notice regarding the condemnation of the warehouse.
Ex 44 Jaime exchanges a building (used in his business) with an adjusted basis of $430,000 and a fair market value of $438,000 for land with a fair market value of $438,000. Is the exchange like-kind? What is the realized gain (loss)?
The exchange qualifies as like-kind (an exchange of business real property for investment real property) and the $8,000 realized gain is deferred. The basis of the land is $430,000 (land's fair market value of $438,000 - $8,000 postponed gain on the building). If the land later is sold for its fair market value of $438,000, the $8,000 postponed gain is recognized.
Ex 54 Megan's warehouse is destroyed by fire on December 16, 2019. The adjusted basis is $325,000. Megan receives $400,000 from the insurance company on February 2, 2020. She is a calendar year and cash method taxpayer. What's the latest date for a replacement that will still qualify as replacement property on taxes?
The latest date for replacement is December 31, 2022 (the end of the taxable year in which realized gain occurred plus two years). The critical date is not the date the involuntary conversion occurred, but rather the date of gain realization.
Ex 55 Assume the same facts as in the previous example, except that Megan's warehouse is condemned. Megan receives notification of the future condemnation on November 1, 2019. The condemnation occurs on December 16, 2019, with the condemnation proceeds being received on February 2, 2020. What's the latest date to recognize replacement property for taxes?
The latest date for replacement is December 31, 2023 (the end of the taxable year in which realized gain occurred plus three years).
Ex 41 Assume the same facts as in Example 39, except that the adjusted basis of Emily's land is $30,000. Emily's realized loss is $6,000 ($24,000 amount realized - $30,000 adjusted basis). What is the recognized loss?
The receipt of the boot of $5,000 does not trigger loss recognition; the recognized loss is $0.
Problem 40 Gary, who is single, sells his principal residence (owned and occupied by him for seven years) in November 2020 for a realized gain of $148,000. He had purchased a more expensive new residence eight months prior to the sale. He anticipates that he will occupy this new house as his principal residence for only about 18 additional months. He expects it to appreciate substantially while he owns it. Gary would like to recognize the realized gain on the 2020 sale to offset a large investment loss from the sale of stock. Can he recognize the realized gain of $148,000 on the sale of his principal residence in 2020? Explain.
The sale of Gary's principal residence in November 2020 qualifies for section 121. Under this provision, none of Gary's realized gain of $148,000 (the $148,000 realized gain is less than the $250,000 exclusion) is recognized. However, Gary can elect to forgo the section 121 exclusion. In this case, his recognized gain is $148,000 (and the recognized gain can be used to offset his large stock investment loss). In making this election to forgo the section 121 election, Gary will need to balance giving up the $148,000 exclusion against the likelihood of his selling his new residence within the next two years and the expected appreciation in the value of the new home. If he sells his new home within 18 month, he will fail the two-year ownership and use test (so any realized gain would be recognized). So if he expects significant appreciation, it might be best to take the section 121 exclusion on his old residence and wait to offset his large investment losses against the gain from his new residence. If he keeps his new residence longer than 2 years, any gain would qualify for a section 121 exclusion
Ex 62 Melissa sells her principal residence on September 18, 2020. She had purchased it on July 5, 2018, and lived in it since then. Does Melissa's sale qualify for the section 121 exclusion?
The sale of Melissa's residence qualifies for the § 121 exclusion.
Ex 38 Phil owns a store in downtown Plano. Adjacent to his store is a commercial parking lot owned by Sally (fair market value of $175,000). Phil would like to acquire the parking lot, which would allow him to expand his store, but Sally does not want to sell the lot due to the large gain she would recognize (her basis in the lot is only $3,000). Phil agrees to purchase any "like-kind" property worth $175,000 that is acceptable to Sally if Sally agrees to immediately transfer the parking lot to Phil. Sally agrees to the plan, and the commercial lot is transferred to Phil on October 1 of the current year. Later that month, Sally identifies a townhouse worth $175,000 and directs Phil to buy it for her. Phil negotiates the sale, which closes on December 12, and transfers the property to Sally. Does this qualify as a like-kind exchange?
This is a like-kind exchange since the replacement property was identified within 45 days of the parking lot being transferred to Phil and the townhouse was transferred to Sally within 180 days of the original transfer date. In effect, Sally sold the parking lot to Phil for $175,000 and then reinvested the proceeds in another piece of real estate without having to pay tax on the realized gain. Her basis in the townhouse ($3,000) reflects the realized gain that is deferred.
Ex 74 On December 5, 2020, Amanda sells her principal residence, which qualifies for the § 121 exclusion. Her realized gain is $190,000. From January through November 2019, she was temporarily out of town on a job assignment in another city and rented the residence to a college student. For this period, she deducted MACRS cost recovery of $7,000. What portion of her realized gain is recognized?
Without the depreciation provision, Amanda could exclude the $190,000 realized gain. However, the depreciation taken requires her to recognize $7,000 of the realized gain.
Problem 37 On June 5, 2020, Brown, Inc., a calendar year taxpayer, receives cash of $750,000 from the county upon condemnation of its warehouse building (adjusted basis of $500,000 and fair market value of $750,000). a. What must Brown do to qualify for § 1033 postponement of gain treatment? b. How would your advice to Brown differ if the adjusted basis was $795,000?
a. $750,000 cash from county - 500,000 AB of building= $250,000.00 realized gain Brown must find another warehouse by Dec 31, 2023, because it's real estate b. $750,000 - 795,000 = ($45,000.00) realized loss Brown can realize the $45,000 loss
Problem 54 Roberto has received various gifts over the years and has decided to dispose of several of these assets. What is the recognized gain or loss from each of the following transactions, assuming that no Federal gift tax was paid when the gifts were made? a. In 1981, he received land worth $32,000. The donor's adjusted basis was $35,000. Roberto sells the land for $95,000 in 2020. b. In 1986, he received stock in Gold Company. The donor's adjusted basis was $19,000. The fair market value on the date of the gift was $34,000. Roberto sells the stock for $40,000 in 2020. c. In 1992, he received land worth $15,000. The donor's adjusted basis was $20,000. Roberto sells the land for $9,000 in 2020. d. In 2013, he received stock worth $30,000. The donor's adjusted basis was $42,000. Roberto sells the stock for $38,000 in 2020. e. Build a spreadsheet-based solution that provides the solution to parts (a) through (d) above and uses only the donor's basis, the fair market value at the time of the gift, and the selling price as inputs. You may want to use the IF and AND functions together
a. $95,000 - 35,000 = $60,000.00 recognized gain b. $40,000 - $19,000 = $21,000.00 realized gain c. $15,000 - 9,000 = $6,000.00 realized loss d. No gain/loss recognized
Problem 61 Helene and Pauline are twin sisters who live in Louisiana and Mississippi, respectively. Helene is married to Frank, and Pauline is married to Richard. Frank and Richard are killed in an auto accident in 2020 while returning from a sporting event. Helene and Frank jointly owned some farmland in Louisiana, a community property state (value of $940,000, cost of $450,000). Pauline and Richard jointly owned some farmland in Mississippi, a common law state (value of $940,000, cost of $450,000). Assume that all of Frank's and Richard's property passes to their surviving wives. a. Calculate Helene's basis in the land. b. Calculate Pauline's basis in the land. What causes the difference?
a. Helene's basis for the land is $940,000, the FMV on the date of Frank's death. Because Louisiana is a community property state, both the decedent's and survivor's shares have basis equal to the FMV on the date of the decedent's death b. Mississippi is a common law state. Therefore, only Richard's share is stepped-up Pauline's 1/2 of the land remains: 225,000 Richard's 1/2 of the land stepped-up: 470,000 Pauline's new basis in the land: 695,000
Problem 45 Norm is negotiating the sale of a tract of his land to Pat. Use the following classification scheme to classify each of the items contained in the proposed sales contract. Legend: DARN = Decreases amount realized by Norm IARN = Increases amount realized by Norm DABN = Decreases adjusted basis to Norm IABN = Increases adjusted basis to Norm DABP = Decreases adjusted basis to Pat IABP = Increases adjusted basis to Pat a. Norm is to receive cash of $50,000. b. Norm is to receive Pat's note payable for $25,000, payable in three years. c. Pat assumes Norm's mortgage of $5,000 on the land. d. Pat agrees to pay the realtor's sales commission of $8,000. e. Pat agrees to pay the property taxes on the land for the entire year. If each party paid his or her respective share, Norm's share would be $1,000 and Pat's share would be $3,000. f. Pat pays legal fees of $500. g. Norm pays legal fees of $750.
a. Norm is to receive cash of $50,000. IARN IABP b. Norm is to receive Pat's note payable for $25,000, payable in three years. IARN IABP c. Pat assumes Norm's mortgage of $5,000 on the land. IARN IABP d. Pat agrees to pay the realtor's sales commission of $8,000. IARN IABP e. Pat agrees to pay the property taxes on the land for the entire year. If each party paid his or her respective share, Norm's share would be $1,000 and Pat's share would be $3,000. IABP by $1,000 IARN by $1,000 f. Pat pays legal fees of $500. IABP g. Norm pays legal fees of $750. DARN
Capital additions .... original basis Capital recoveries .... the original basis
increase, decrease
Ex 58 Return to the facts of The Big Picture on p. 13-1. Alice's building (used in her trade or business), with an adjusted basis of $50,000, is destroyed by fire on October 5, 2020. Alice is a calendar year taxpayer. On November 17, 2020, she receives an insurance reimbursement of $100,000 for the loss. Alice invests $80,000 in a new building. Alice uses the other $20,000 of insurance proceeds to pay off credit card debt. What's the latest date Alice can recognize the replacement property? What's Alice's realized gain (loss)? What's Alice's recognized gain? What's the basis for the new building?
• Alice has until December 31, 2022, to make the new investment and qualify for the nonrecognition election. • Alice's realized gain is $50,000 ($100,000 insurance proceeds received - $50,000 adjusted basis of old building). • Assuming that the replacement property qualifies as similar or related in service or use, Alice's recognized gain is $20,000. Because she reinvested $20,000 less than the insurance proceeds received ($100,000 proceeds - $80,000 reinvested), her realized gain is recognized to that extent. • Alice's basis in the new building is $50,000. This is the building's cost of $80,000 less the postponed gain of $30,000 (realized gain of $50,000 - recognized gain of $20,000)
Ex 5 Return to the facts of Example 3. What are ways one can determine the fair market value of the land Juan is receiving? Ex 3: Juan sells a machine used in his landscaping business to Peter for $20,000 cash plus four acres of property that Peter owns in a nearby town with a fair market value of $36,000. Juan's amount realized on this sale is $56,000 ($20,000 cash $36,000 land)
• An appraiser can be paid to provide an appraisal of the land. • City or county property tax assessment information may also be helpful; the city or county assessor is tasked with the responsibility of determining the fair market value of property so that property taxes are levied appropriately. •If the exchange is between a willing buyer and seller, determining the fair market value of Juan's landscaping machine could answer the question (i.e., given the facts of the case, it should be worth $56,000).
