Chapter 13

Question 1

Like-Kind Exchanges

Answer 1

A like-kind exchange resulting in tax deferral provides a benefit to investors by allowing the taxpayer to keep all of the cash proceeds of the sale and thus reinvest the full cash proceeds in a new property. By not paying tax currently, the taxpayer is indirectly borrowing at a zero percent rate from the U.S government, and hopefully generating greater returns on their investments. The use of like-kind provisions is mandatory if applicable.

Question 2

What are a few assets that qualify for like-kind exchange treatment?

Answer 2

Assets held for trade or business. Assets held for production income. Note: Personal use assets (e.g., personal residences do not qualify for like-kind exchange treatment. However, personal residences are afforded special tax treatment.

Question 3

Requirements for Like-kind Nonsimultaneous Exchange Treatment

Answer 3

The proceeds from the sale of the original property must be held by an escrow agent. A replacement property must be identified within 45 days of the sale of the original property. The closing on the replacement property must take place by the earlier of 1. 180 days from the sale of the original property or 2. the due date of the tax return for the year the original property was sold.

Question 4

Related-Party Transactions

Answer 4

If a like-kind exchange of property occurs between related parties, and the related party disposes of the property received in the exchange within two years, the deferred gain is recognized in the year of the disposition of the property.

Question 5

T/F In the event that the property is disposed of within a two year period due to death of the related party, or as a result of an involuntary conversion, the gain will be accelerated

Answer 5

False, the gain will not be accelerated.

Question 6

Boot-

Answer 6

If a taxpayer receives non-like-kind property in exchange for the asset, he is not keeping the asset in the same investment solution. Non-like-kind property received in an exchange, usually cash or debt forgiveness, is referred to as boot.

Question 7

Assumption of Debt

Answer 7

One last issue concerning the taxation of like-kind-exchanges is important to review, the consequences of liability relief, or liability assumption, with the exchange. When a mortgage is transferred with the property, the party transferring the mortgage is treated as having received boot equal to the amount of debt relief, and the party undertaking the mortgage obligation is treated as giving boot.

Question 8

Losses on 1031 Exchanges

Answer 8

The rule is different for losses under a like-kind exchange. In this case, receiving boot does not result in recognition of a realized loss, but rather a reduction of basis.

Question 9

Basis of Like-Kind Property Received

Answer 9

Section 1031 provides the follwoing basis calculation formula for like-kind property received; Basis of like kind property + basis of boot given + gain recognized - fair market value of boot received - loss recegnized

Question 10

Holding Period

Answer 10

A separate holding period rule applies for the boot and the like-kind property received. The boot has a new holding period. The like=kind property received generally has a carryover holding period as well as tax attributes.

Question 11

Involuntary Conversion

Answer 11

When a realization event occurs outside the control of the taxpayer, the event is referred to as an involuntary conversion. The result of destruction of property, theft, seizure, requisition, or condemnation, or the sale or exchange under threat of imminence of requisition or condemnation of the taxpayer’s property.

Question 12

T/F An involuntary conversion is only the result of complete destruction of the taxpayer’s property

Answer 12

False

Question 13

T?F The form of the involuntary conversion may be either direct or indirect

Answer 13

True.

Question 14

T/F To avoid recognition of the gain on an involuntary conversion the taxpayer must invest the proceeds in a replacement property that has similar use that was involuntarily converted.

Answer 14

True.

Question 15

T/F The taxpayer must reinvest the proceeds from the involuntary conversion within a statutorily specified period in order to defer the realized gain

Answer 15

True. The reinvestment period varies depending upon the type of conversion the taxpayer experienced

Question 16

Default Rule

Answer 16

Default rule gives the taxpayer two years from the end of the year in which the conversion occurred to replace the property with similar use property.

Question 17

Conversion Special Rule

Answer 17

A special rule applies to involuntary conversions due to governmental action, or condemnation. When a property is condemned by the local, state, and national government through the eminent domain process, the taxpayer has one additional year to find replacement property in order to avoid recognition of gain.

Question 18

Exchanging Life Insurance

Answer 18

May be exchanged for life insurance, modified endowment, contract, annuity contract

Question 19

Exchanging Modified Endowment Contract

Answer 19

Modified endowment contract, contract, annuity

Question 20

Annuity

Answer 20

Annuity

Question 21

Section 1041

Answer 21

Under Section 1041, all transactions between spouses or incident to a divorce result in a carry-over basis and carry-over of holding period.

Question 22

Section 121

Answer 22

The most commonly used type of nontaxable exchange occurs when an individual sells his or her personal residence. Excludes up to 500,000 (MFJ) of the gain from the sale of a principal residence from income tax if certain requirements are met.

Question 23

What are the requirements for section 121

Answer 23

Two requirements must be met. First the taxpayer must have owned and used the home as his principal residence for two out of the last five years. Second, to claim the exemption, the taxpayer must not have excluded gain on the sale of a principal residence within the last two years.

Question 24

Proration of the exclusion

Answer 24

If a principal residence is sold before the two-year ownership and use test is met, or if the exclusion was used during the last two years, it may be possible to qualify for a reduced exclusion

Question 25

Reduced Exclusion

Answer 25

Will be available when the sale of the principal residence is caused by 1. change in employment, 2. change in health, or 3. an unforseen circumstance. # of months of use/24 times applicable exclusion. The property sold must have been the taxpayer’s principal residence.

Question 26

The Housing Assistance Tax Act of 2008

Answer 26

Modified Section 121 allowing exclusion for only qualified use periods Before 2009, if you owned a property but did not use it for a qualified purpose, the full exclusion will still apply if the taxpayer met other tests. Beginning in 2009 any appreciation attributed to a nonqualified use period does not qualify for secition 121 exclussion.