Ch 9: Non-taxable Exchnages

Question 1

What is a nontaxable exchange?

Answer 1

Nontaxable Exchanges - A nontaxable exchange is an exchange in which any gain is not taxed and any loss can not be deducted.

Question 2

What is the key benefit of a nontaxable exchange?

Answer 2

Allow taxpayers to convert property from one form to another without a tax cost.

Question 3

What are characteristics of a nontaxable exchange?

Answer 3

Common characteristics of a generic nontaxable
exchange.
• Exchange of one qualifying property for another.
• Equal FMVs of properties exchanged (value-for-value presumption).
• Realized gain or loss is not recognized.

Question 4

What is a “boot”?

Answer 4

Boot is any non-qualifying property included in the

exchange.

Question 5

What does “FMV” stand for?

Answer 5

fair market value

Question 6

What is the purpose of a “boot”?

Answer 6

Inclusion of boot is needed if FMVs of the exchanged

properties are unequal.

Question 7

How are realized gains recognized when a trade occurs that requires a boot?

Answer 7

Realized gain is recognized up to the FMV of

boot

Question 8

Assume a person exchanged property that had experienced an unrecognized gain. The exchange featured a boot. How would one calculate taxable base?

Answer 8

Basis of property surrendered + gain recognized −

FMV boot received

Question 9

—————————-BACKGROUND—————————-
Walter has property with FMV $100, basis $60.
• Jesse has property with FMV $100, basis $110.
• Walter and Jesse exchange properties.

—————————– QUESTION ——————————-
• How much gain do they realize and recognize?

Answer 9

• Walter realizes but does not recognize $40 gain.

* Jesse realizes but does not recognize $10 loss.

Question 10

—————————-BACKGROUND—————————-
Walter has property with FMV $100, basis $60.
• Jesse has property with FMV $100, basis $110.
• Walter and Jesse exchange properties.

—————————– QUESTION ——————————-
• What is their basis in the new property?

Answer 10

Walter’s basis in his new property is $60 (FMV
$100 − $40 deferred gain).

• Jesse’s basis in his new property is $110 (FMV
$100 + $10 deferred loss)

Question 11

—————————-BACKGROUND—————————-
Jon has qualifying property with a $1,000 FMV
and $700 basis. Tyrion has qualifying property
with a $900 FMV and $100 cash.

—————————– QUESTION ——————————-
• If they enter into an exchange, what is Jon’s
realized and recognized gain?

Answer 11

Jon’s realized gain is $300.

He recognizes $100 gain and defers $200 gain

(Recognized gain is equal to the FMV of the boot received)

Question 12

—————————-BACKGROUND—————————-
Jon has qualifying property with a $1,000 FMV
and $700 basis. Tyrion has qualifying property
with a $900 FMV and $100 cash.

—————————– QUESTION ——————————-
• What is Jon’s basis in the property received?

Answer 12

Jon’s basis in the property received is $700.
• $700 substituted basis + $100 gain recognized − $100
boot received.
• $900 FMV − $200 deferred gain.

Question 13

—————————-BACKGROUND—————————-
Tyrion exchanges qualifying property with a $900
FMV and $280 basis plus $100 cash for qualifying property with a $1,000 FMV.

—————————– QUESTION ——————————-
• What is Tyrion’s realized and recognized gain?

Answer 13

Tyrion’s entire $620 realized gain on the exchange

of qualifying property is deferred.

Question 14

—————————-True / False ——————————–
Paying cash boot does not trigger gain recognition

Answer 14

TRUE
• The substituted basis rule when boot is paid.
• Basis of qualifying property surrendered + FMV of
boot paid.

Question 15

What are the four types of nontaxable exchanges?

Answer 15

• Like-kind exchanges.
• Involuntary conversions.
• Exchanges of property for equity in a corporation 
or partnership.
• Wash sales.

Question 16

—————————-BACKGROUND—————————-
• Archer owns an office building with $200,000 FMV and $70,000 basis.
• Lana owns investment land with a $170,000 FMV
and $115,000 basis.

—————————– QUESTION ——————————-
• If Archer and Lana decide to exchange realty,
who must pay boot to equalize the exchange?

Answer 16

Lana must pay Archer $30,000 boot

Question 17

—————————-BACKGROUND—————————-
• Archer owns an office building with $200,000 FMV and $70,000 basis.
• Lana owns investment land with a $170,000 FMV
and $115,000 basis.

—————————– QUESTION ——————————-
• What is each’s realized gain and recognized gain?

Answer 17

• Archer realizes $130,000 gain ($170,000 FMV of
land + $30,000 cash − $70,000 basis of office
building) and recognizes $30,000 gain (boot
received).

• Lana realizes $55,000 gain ($200,000 FMV of
office building − $145,000 total basis of land and
cash) and recognizes no gain.

Question 18

What is “REALIZED GAIN” ?

Answer 18

Realized gain is defined as the net sale price minus the adjusted tax basis.

Question 19

What is the “ADJUSTED TAX BASIS” ?

Answer 19

Adjusted Tax Basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.

Question 20

What is the “RECOGNIZED GAIN” ?

Answer 20

Recognized gain is the taxable portion of the realized gain.

Question 21

What is the objective in a tax-deferred exchange?

Answer 21

The common objective in a tax deferred exchange is disposing of a property containing significant realized gain and acquiring a “like-kind” replacement property so there is no recognized gain.

In order to defer all capital gain taxes.

Question 22

What is an involuntary conversion?

Answer 22

Refer to cases in which you receive compensation for the destruction, theft or confiscation of property

Question 23

————————— BACKGROUND ———————
Assume an involuntary loss occurs.

————————- TRUE / FALSE ————————-
If insurance proceeds exceed basis of converted
property, the taxpayer may elect to defer gain
recognition.

Answer 23

TRUE

Question 24

————————— BACKGROUND ———————
Assume an involuntary loss occurs.

————————- TRUE / FALSE ————————-
If basis of converted property exceeds insurance
proceeds, the taxpayer recognizes ordinary loss

Answer 24

TRUE

Question 25

————————— BACKGROUND ———————
Assume an involuntary loss occurs.

————————- QUESTION ————————-
What are the requirements for a deferred gain?

Answer 25

Requirements to defer gain:
• Reinvest proceeds in property similar or related in
service or use to converted property.

Question 26

————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.

————————- QUESTION ————————-
What is Saul’s realized gain?

Answer 26

Saul realized a $150,000 gain on the involuntary

conversion.

Question 27

————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.

————————- QUESTION ————————-
What is Saul’s recognized gain?

Answer 27

If Saul pays $700,000 to build a replacement

factory, he may elect to defer recognizing the gain

Question 28

————————— BACKGROUND ———————
Saul’s factory had a $500,000 adjusted basis.
The factory was destroyed by a tornado, and
Saul received $650,000 from the insurance
company.

————————- QUESTION ————————-
If Saul pay’s $700,000 for the new factory, what is Saul’s basis in the new factory?

Answer 28

His basis in the new factory is $550,000 ($700,000

cost − $150,000 deferred gain).