3.2 - Taxable & Nontaxable Dispositions

Question 1

What does realized mean? What does recognized mean?

Answer 1

Realized: real world
Recognized: recorded on tax return

Question 2

What is the calculation used to calculate the gain or loss on disposition?

Answer 2

Amount realized - adjusted basis of asset sold = gain or loss

Question 3

What is included in amount realized?

Answer 3

Money received
COD (excess debt)
FMV of property
(Subtract out) selling expenses

Question 4

What’s included in the adjusted basis of asset sold?

Answer 4

If purchased - cost
If gifted - rollover cost
If inherited - step up to FMV

Question 5

A gain is not taxed if what?

Answer 5

The taxpayer can HIDE IT.
Gain to the extent of cash/boot received is taxable.

Question 6

What is included in HIDE IT that is non taxable gains?

Answer 6

Homeowners exclusion
Involuntary conversions
Divorce property settlement
Exchange of like-kind (business)
Installment sale
Treasury capital and stock

Question 7

What amount is available for exclusion of the homeowners exclusion?

Answer 7

$500,000 for MFJ, $250,000 for Single, MFS and HOH
Excess amount is taxable

Question 8

How does one qualify for the homeowners exclusion?

Answer 8

Taxpayer must have owned and used the property as a principal residence for 2 out of 5 years ending on the date of the sale

Question 9

Under the hardship provision of the homeowners exclusion, how is the maximum exclusion calculated?

Answer 9

Max exclusion amount based on filing stats X (number of months of ownership / 24 months)

Question 10

How does one qualify for the homeowners exclusion hardship provision?

Answer 10

The taxpayers place of employment must be at least 50 miles further from the residence that is sold

Question 11

One year after purchasing her home, a single taxpayer was diagnosed with cancer. The taxpayer sold her home to move in with her daughter. The taxpayer sold the home for a gain of $150,000. What amount of the gain of the homeowners exclusion is available to the taxpayer?

Answer 11

12 months / 24 months = 50%
50% X 250,000 (single exclusion amount) = $125,000

Question 12

A single taxpayer bout a new home. She lived there for one year. She transferred to a new city for 2 years for work and rented her home while she was away. After 2 years, she returned to live in the house for 1 year before selling for a gain of $50,000. Determine any amount of the gain that is NOT eligible for the homeowners exclusion.

Answer 12

2 lives in ; 2 rented = 2/4 = 50% not eligible
50% X 50,000 gain = $25,000 is not eligible for he exclusion

Question 13

Under the involuntary conversions of property, no gain is recognized (it is excluded) when?

Answer 13

Similar property is received to replace the involuntarily converted property
OR
All insurance or condemnation proceeds are reinvested in similar property

Question 14

For principal residences destroyed in a federally declared disaster area, the replacement period is how many years?
For real property held for use in trade or business or for investment that is converted by seizure, requisition, or condemnation but not theft or destruction, the replacement period is how many years?

Answer 14

4 years
3 years

Question 15

What is the general replacement period for personal property and business property under the involuntary conversions rule?

Answer 15

Personal = 2 years
Business = 3 years

Question 16

A taxpayer owned a building with an adjusted basis of $400,000. The state condemned it and awarded him $450,000. The taxpayer bought a new building for $440,000. What is the gain realized, gain recognized, and the basis of the new building?

Answer 16

450,000 - 400,000 = 50,000 gain realized
450,000 - 440,000 = 10,000 gain recognized
50,000 - 10,000 = 40,000 deferred gain
440,000 - 40,000 deferred gain = 400,000 basis of new building

Question 17

A taxpayer had a factory with a cost basis of $340,000 that was destroyed in a fire. The insurance company paid the taxpayer $330,000 and the taxpayer used the money to buy a new plant for $500,000. Determine any loss recognized on the involuntary conversion and the basis of the new property.

Answer 17

340,000 - 330,000 = 10,000 loss recognized
500,000 is the new buildings cost basis

Question 18

What property qualifies for the non recognition treatment under the exchange for like-kind business/investment real property?

Answer 18

Really property used in trade or business or held for investment

Question 19

What are the timing requirements fir the exchange of like kind business/investment real property?

Answer 19

The taxpayer must identify replacement property within 45 days of giving up property
And
The new property must be received by the earlier of 180 days after the taxpayer transfers the property OR the due date of the income tax return

Question 20

A taxpayer owns real estate held for investment that is worth $40,000 and has an adjusted basis of $25,000. The taxpayer exchanges this property for other real estate held for investment worth $35,000 and $5,000 cash. Determine the realized gain and the recognized gain.

Answer 20

35,000 +5,000 = 40,000 - 25,000 = 15,000 realized gain
5,000 recognized gain (only extent of loot is recognized)
10,000 is deferred gain

Question 21

What is the formula to calculate the basis in like kind property received when boot is received?

Answer 21

FMV of like kind property received - deferred gain + deferred loss

Question 22

A taxpayer owns real estate held for investment worth $40,000 and has an adjusted basis of $25,000. The taxpayer exchanges the property for other real estate with $35,000 and $5,000 in cash. Determine the taxpayer’s basis in the new property.

Answer 22

35,000 + 5,000 = 40,000 - 25,000 = 15,000 realized gain
15,000 - 5,000 = 10,000 deferred gain

35,000 - 10,000 = 25,000 adjusted basis of new property

Question 23

What happens to losses in a like kind exchange?

Answer 23

Losses are not recognized and are instead deferred and increase the adjusted basis of new property

Question 24

A taxpayer exchanges a warehouse used for business for another warehouse to be used in business. The warehouse originally cost $35,000 and is worth $20,000. The taxpayer has taken $18,000 of depreciation on the old warehouse assume that the warehouse the taxpayer wants to exchange for is worth $20,000.
1. Determine the gain or loss realized
2. Determine the gain or loss recognized
3. Determine the gain or loss deferred
4. Determine the new property’s adjusted basis

Answer 24

1. 35,000 - 18,000 = 17,000 NBV - 20,000 = 3,000 realized gain
2. $0, because no boot was received
3. 3,000 deferred
4. 20,000 - 3,000 = 17,000 new adjusted basis

Question 25

A taxpayer exchanges a warehouse for another warehouse. The warehouse originally cost $35,000 and is currently worth $20,000. The warehouse the taxpayer is exchanging for is worth $20,000 and the taxpayer has taken $12,000 of depreciation on the old warehouse.
Determine the realized gain or loss, the recognized gain or loss, the deferred gain or loss, and the basis of the new property received.

Answer 25

1. 35,000 - 12,000 = 23,000 - 20,000 = 3,000 realized loss
2. $0 loss recognized
3. $3,000 deferred loss
4. 20,000 + 3,000 = 23,000 new property adjusted basis

Question 26

A taxpayer exchanges a warehouse for another warehouse. The warehouse originally cost $35,000 and has taken $18,000 depreciation. The old warehouse is currently worth $20,000. The warehouse the taxpayer is exchanging for is worth $16,500 so the other party agrees to give the taxpayer $3,500 in cash in addition.
Determine the realized gain or loss, the recognized gain or loss, the deferred gain or loss, and the basis of the new property received.

Answer 26

1. 35,000 - 18,000 = 17,000
   16,500 + 3,500 = 20,000 - 17,000 = 3,000 realized gain
2. 3,000 recognized gain (does not exceed boot)
3. 0 deferred gain
4. 16,500 adjusted basis of new property

Question 27

A taxpayer exchanges a warehouse for another warehouse. The warehouse originally cost $35,000 and has taken $18,000 depreciation. The old warehouse is currently worth $20,000. The warehouse the taxpayer is exchanging for is worth $17,500 so the other party agrees to give the taxpayer $2,500 in cash in addition.
Determine the realized gain or loss, the recognized gain or loss, the deferred gain or loss, and the basis of the new property received.

Answer 27

1. 35,000 - 18,000 = 17,000
   17,500 + 2,500 = 20,000 - 17,000 = 3,000 realized gain
2. $2,500 recognized gain
3. 500 deferred gain
4. 17,500 - 500 = 17,000 adjusted basis of new property

Question 28

A taxpayer exchanges a warehouse for another warehouse. The warehouse originally cost $35,000 and has taken $18,000 depreciation. The old warehouse is currently worth $20,000. The warehouse the taxpayer is exchanging for is worth $22,000 so the taxpayer agrees to give the other party $2,000 in cash in addition to the old warehouse.
Determine the realized gain or loss, the recognized gain or loss, the deferred gain or loss, and the basis of the new property received.

Answer 28

1. 35,000 - 18,000 + 2,000 =19,000 - 22,000 = 3,000 realized gain
2. 0 gain recognized because no boot received (boot was paid)
3. 3,000 deferred gain
4. 22,000 - 3,000 = 19,000 adjusted basis of new property

Question 29

A taxpayer exchanges a warehouse for another warehouse. The warehouse originally cost $35,000 and has taken $18,000 depreciation. The old warehouse is currently worth $20,000 and has $5,000 of remaining secured debt attached. The warehouse the taxpayer is exchanging for is worth $18,000 and has $3,000 of remaining secured debt attached.
Determine the realized gain or loss, the recognized gain or loss, the deferred gain or loss, and the basis of the new property received.

Answer 29

1. 35,000 - 18,000 - 5,000 = 12,000
   18,000 - 3,000 = 15,000 - 12,000 = 3,000 realized gain
2. 5,000 - 3,000 = 2,000 < 3,000 gain; therefore realized gain = 2,000
3. 1,000 deferred gain
   4 18,000 - 1,000 = 17,000 adjusted basis of new property

Question 30

When are installment sales taxed?

Answer 30

Taxed when cash payment is received

Question 31

What type of corporate transactions are exempt from gain (and any losses are disallowed) under the treasury an capital stock transactions rule?

Answer 31

Sales of stock by corporation
Repurchase of stock by corporation
Reissue of stock

Question 32

What losses are no deductible (WRAP)?

Answer 32

Wash sale loss
Related party loss
And
Personal losses

Question 33

This exists when a security (stock or bond) is sold for a loss and is repurchase within 30 days before or after the sale date?

Answer 33

Wash sale loss

Question 34

What is the basis of the repurchased security under wash sales?

Answer 34

The purchase price of the new security + the disallowed loss on the wash sale

Question 35

What is the date of acquisition of the repurchased security under wash sales?

Answer 35

The date of acquisition of the original security

Question 36

Is the Gain under wash sales recognized and realized?

Answer 36

It is recognized but not taxed

Question 37

A taxpayer entered into the following transactions in April:
A: 100 shares - cost $22,000 - sold $21,000
B: 100 shares - cost $21,500

Determine the amount of any loss allowed an the basis of the purchased stock.

Answer 37

22,000 - 21,000 = 1,000 loss
21,500 + 1,000 disallowed loss = 22,500 basis