Basis And The Tax Consequences Of The Dispositions Of Property: property transactions, non-taxable exchanges

Question 1

Like kind exchanges, section 1031, provides for non-taxable exchange treatment if the following requirements are satisfied

Answer 1

1. Form of the transaction is an exchange.
2. Both the real property transferred, and the real property received our held either for productive use in a trade or business or for investment.
3. The property is domestic real estate for domestic real estate.

Question 2

What does like kind property mean?

Answer 2

Refer to the nature or character of the property and not too much grade or quality. Only domestic real property qualifies for light time treatment

Question 3

What is boot?

Answer 3

Property received in an exchange that is not like kind property

Includes: cash received, liabilities assumed by the other party from the original taxpayer, other non-like kind property, such as personal property received in an exchange involving real property

Question 4

The receipt of boot will result in what?

Answer 4

Recognition of gain, if there is a realized gain or no recognition, if there is a realized loss

Question 5

If the boot is appreciated or depreciated property, how is is the gain or loss recognized?

Answer 5

Gain or loss is recognized, to the extent of the difference between the FMV and adjusted basis of the boot as though there had been a sale of the property used as boot

Question 6

Answer 6

Question 7

Answer 7

Question 8

If a mortgage is assumed by a buyer that represents boot to who?

Answer 8

The seller

Question 9

How do you determine the basis of like kind property received?

Answer 9

Question 10

What is the holding period of the real property received in a like kind exchange

Answer 10

Holding period of the real property surrendered in the exchange carries over and adds to the holding period of the real estate received

Question 11

When does Boot’s period start?

Answer 11

Starts from the date of exchange and is not considered a carryover holding.

Question 12

Exchange with a related party taxpayer and related party must not dispose of real estate received in the exchange within how many years following the exchange

Answer 12

Two years except for death and involuntary conversions

Question 13

What is a section 1033 involuntary conversion?

Answer 13

Results from the destruction (complete or partial), theft, seizure, requisition, condemnation, or sale or exchange under threat or imminence of requisition or condemnation of the taxpayers property

Question 14

What does section 1033 involuntary conversions allow a taxpayer to do?

Answer 14

Allows a taxpayer who occurs and involuntary conversion to postpone recognition of gain realized from the conversion

Only applies to gains not losses

Question 15

Under section 1033 involuntary conversions what are the rules for non-recognition

Answer 15

If the amount reinvested in replacement property equals or exceeds the amount realized, the realize gain is not recognized

The amount reinvested in replacement property is less than the amount realized, the realized gain is recognized to the extent proceeds, not reinvested

Question 16

In a section 1033 in voluntary conversions, what is the requirement for the replacement property and what to test apply?

Answer 16

The replacement property must be similar in service or use to the involuntary converted property

For an owner user , the functional test applies, and for an owner investor, the taxpayer use test applies

Question 17

Section 1033 involuntary conversions what is the functional use test

Answer 17

For owner users

The taxpayers use of the replacement property and of the involuntary converted property must be the same

Question 18

Section 1033 in voluntary conversions what is the taxpayer use test?

Answer 18

For an owner investor

Owner investors properties must be used in similar endeavors as the previously held properties

Question 19

Section 1033 involuntary conversions what is the time limitation on replacement property?

Answer 19

Taxpayer has two-year period from the end of the taxable year in which any gain is realize from the involuntary conversion to replace the property

Condemnation of real property used in a trade or business or held for investment has a three year period

Question 20

Answer 20

Question 21

Sale of a personal residence gives a universal exclusion of up to what amounts for single and married couples

Answer 21

$500,000 MFJ
$250,000 Single

Home must have been owned and used as a principal residence for at least two years of the five years before the sale (does not have to be consecutive years)

Either spouse can meet the ownership requirement, must meet the use requirement

Fails to meet the ownership and use test. Taxpayer may be entitled to a partial exclusion based on the shorter of either use or ownership.

Question 22

Gloria, a single taxpayer, sold her condominium in Seattle because she has a new job in Detroit. On the sale date she had on the condo for only 18 months. Gloria failed to meet both the use and ownership test because of a change in employment, so she receives a partial exclusion. What is the exclusion amount?

Answer 22

(Months lived in / 24 months) x Exclusion amount

(18 / 24) x $250,000 = $187,500

Question 23

Mary and Wallace get married, and Wallace moves into the house that Mary has been using as her principal residence for six years. Nine months later, Wallace gets a big promotion and the newlyweds moved to another city. They realize a $700,000 gain on the sale of their residence meets both the ownership and use test. She gets a full exclusion of $250,000. Wallace does not meet the ownership test (because his wife did), but he is held to the use test. He is only been there nine months, so what is their total exclusion?

Answer 23

Wallace does not meet the use Test, so is his exclusion is

(9 / 24) x $250,000 = $93,750

Mary get full exclusion because she meets the ownership and use test $250,000

So total exclusion is $250,000 + $93,750 = $343,750

Question 24

Are losses for a personal residence recognized

Answer 24

No

Question 25

A surviving single spouse qualifies for up to $500,000 exclusion if the sale occurs no later than what?

Answer 25

Two years after the other spouses death