11. Nonrecognition property transactions

Question 1

Can a loss be recognized on the sale of a personal residence?

Answer 1

No, a loss cannot be recognized.

Question 2

How long must an individual own and occupy a residence to be eligible for the Sec. 121 exclusion?

Answer 2

The exclusion is available if the individual owned and occupied the residence for an aggregate of at least 2 of the 5 years before the sale. The exclusion amount may be prorated if the use, ownership, or prior sale tests are not met.

Question 3

How often may a taxpayer use the Sec. 121 exclusion of gain upon the sale of a principal residence?

Answer 3

The exclusion may be used only once every 2 years.

Question 4

How much realized gain from the sale of a principal residence may a single individual exclude?

Answer 4

A taxpayer may exclude up to $250,000 of realized gain on the sale of a principal residence.

Question 5

How much realized gain from the sale of a principal residence may a married person filing jointly exclude?

Answer 5

The taxpayer may exclude $500,000 on a joint return.

Question 5

How much realized gain from the sale of a principal residence may a married person filing jointly exclude?

Answer 5

The taxpayer may exclude $500,000 on a joint return.

Question 6

What is required for married individuals filing jointly to be eligible for the $500,000 Sec. 121 exclusion?

Answer 6

The exclusion is increased to $500,000 for married individuals filing jointly if
1.Either spouse meets the ownership test,
2.Both spouses meet the use test, and
3.Neither spouse is ineligible for the exclusion by virtue of a sale or an exchange of a residence within the last 2 years.

Question 6

What is required for married individuals filing jointly to be eligible for the $500,000 Sec. 121 exclusion?

Answer 6

The exclusion is increased to $500,000 for married individuals filing jointly if
1.Either spouse meets the ownership test,
2.Both spouses meet the use test, and
3.Neither spouse is ineligible for the exclusion by virtue of a sale or an exchange of a residence within the last 2 years.

Question 7

When can a surviving spouse qualify for the entire $500,000 Sec. 121 exclusion?

Answer 7

A surviving spouse can qualify for the $500,000 exclusion if the residence is sold within 2 years of the other spouse’s death.

Question 8

If a single individual eligible for the Sec. 121 exclusion marries a person who used the exclusion within the 2 years before marriage, is that individual still entitled to a $250,000 Sec. 121 exclusion?

Answer 8

Yes, the individual is still entitled to the exclusion.

Question 9

What happens to the time during which the taxpayer’s spouse or former spouse owned a residence if the residence is transferred as part of a divorce?

Answer 9

The time during which the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership.

Question 10

Should a widowed taxpayer exclude the period during which the taxpayer’s deceased spouse owned the residence from their period of ownership?

Answer 10

No, a widowed taxpayer’s period of ownership of residence includes the period during which the taxpayer’s deceased spouse owned the residence.

Question 11

Can the Sec. 121 exclusion amount be prorated?

Answer 11

Yes, if the use, ownership, or prior sale tests are not met.

Question 12

Under what circumstances can a taxpayer utilize the pro rata Sec. 121 exclusion?

Answer 12

Only when the sale is due to a change in
1.Place of employment,
2.Health, or
3.Unforeseen circumstances.

Question 13

For the purposes of the Sec. 121 exclusion, what is nonqualified use?

Answer 13

Nonqualified use includes periods that a residence was not used as the principal residence of the taxpayer, prior to the last day the homeowner lived in the house. Nonqualified use does not include use before 2009.

Question 14

Can the portion of a house that is business-use property qualify for Sec. 121 gain exclusion?

Answer 14

No, the portion of the house that is business-use property may not qualify for gain exclusion.

Question 15

In regards to Sec. 121, if the business-use property is within your home, such as a room used as an office for a business, what part is included in income?

Answer 15

The part included is any gain equal to any depreciation allowed or allowable after May 6, 1997.

Question 16

In regards to Sec. 121, if the business-use property is a separate part of the property from the home portion, a taxpayer must

Answer 16

Allocate the basis of the property and the amount realized upon its sale between the business rental part and the part used as a home. Any gain associated with the business-use property is not eligible for the exclusion.

Question 17

Basis in a new home is its

Answer 17

Cost.

Question 18

Does the Sec. 121 exclusion of gain apply in situations where the residence was acquired in a like-kind exchange?

Answer 18

If the residence was acquired in a Sec. 1031 like-kind exchange in which any gain was not recognized in the prior 5 years, then the Sec. 121 exclusion for gain on sale or exchange of a principal residence does not apply.

Question 19

What is the impact of Sec. 1031 as it relates to gain or loss on a like-kind exchange?

Answer 19

Sec. 1031 defers recognizing gain or loss to the extent that real property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like-kind.

Question 20

What is like-kind real property?

Answer 20

Like-kind real property is alike in nature or character but not necessarily in grade or quality.

Question 21

Will differences in use affect whether properties that are within a class of like nature or character are considered like-kind?

Answer 21

No, differences in use will not affect classification as like-kind.

Question 22

Are domestic real property and foreign real property considered like-kind?

Answer 22

No. Real property located within the U.S. is like-kind with all other real property in the U.S. Foreign real estate is like-kind with other foreign real estate. But, U.S. real estate and foreign real estate are not like-kind.

Question 23

Regarding Sec. 1031, what is boot?

Answer 23

Boot is all nonqualified property transferred in an exchange transaction.

Question 24

In a like-kind exchange, if boot is received, how much realized gain will be recognized?

Answer 24

Gain recognized is equal to the lesser of gain realized or boot received.

Question 25

What is the basis of qualified property received in a like-kind exchange?

Answer 25

Adjusted basis of property given
+Gain recognized
+Boot given
–Boot received + Exchange fees incurred
–Loss recognized
—————————————————–
=Basis in acquired property

Question 26

In a like-kind exchange, how much loss realized will be recognized?

Answer 26

If some qualified property is exchanged, loss realized with respect to qualified or other property is not recognized. However, loss may need to be recognized on boot given.

Question 27

An exchange of like-kind properties must be completed within the earlier of

Answer 27

1.180 days after the transfer of the exchanged property or
2.The due date for the transferor’s tax return for the taxable year in which the exchange took place.

Question 29

Are there special rules for like-kind exchanges between related parties?

Answer 29

Yes, the related party cannot dispose of the property within 2 years after the date of the last transfer that was part of the exchange in order to avoid recognizing any gain on the initial exchange.

Question 29

What is required for married individuals filing jointly to be eligible for the $500,000 Sec. 121 exclusion?

Answer 29

The exclusion is increased to $500,000 for married individuals filing jointly if
1.Either spouse meets the ownership test,
2.Both spouses meet the use test, and
3.Neither spouse is ineligible for the exclusion by virtue of a sale or an exchange of a residence within the last 2 years.