Chapter 13 Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Question 1

If the amount realized exceeds the property’s adjusted basis, the result is
a

Answer 1

realized gain

Question 2

if the property’s adjusted basis exceeds the amount realized,
the result is a

Answer 2

realized loss

Question 3

Tab sells Swan Corporation stock with an adjusted basis of $3,000 for $5,000. Tab’s E X A M P L E 1
realized gain is

Answer 3

2,000

Question 4

is defined broadly in the tax law and includes virtually
any disposition of property. Thus, transactions such as trade-ins, casualties, condemnations,
thefts, and bond retirements are treated as dispositions of property.

Answer 4

sale or other disposition

Question 5

Lori owns Tan Corporation stock that cost $3,000. The stock has appreciated in value E X A M P L E 2
by $2,000 since Lori purchased it. Lori has realized gain?

Answer 5

False. Lori has no realized gain because mere fluctuation in

value is not a disposition or an identifiable event for tax purposes. Same goes for if it falls in value.

Question 6

The _______ ________ from a sale or other disposition of property is the sum of any
money received plus the fair market value of other property received

Answer 6

amount realized. The amount realized also includes any liability on the property disposed of, such
as a mortgage debt, if the buyer assumes the mortgage or the property is sold subject
to the mortgage

Question 7

Barry sells property on which there is a mortgage of $20,000 to Cole for $50,000 cash. E X A M P L E 4
Barry’s amount realized from the sale is

Answer 7

$70,000 if Cole assumes the mortgage or takes

the property subject to the mortgage.

Question 8

The _____ ______ _______ of property received in a sale or other disposition has been
defined by the courts as the price at which property will change hands between a
willing seller and a willing buyer when neither is compelled to sell or buy

Answer 8

fair market value

Question 9

The adjusted basis of property disposed of is

Answer 9

the property’s original basis adjusted

to the date of disposition

Question 10

is the cost or other basis of the property

on the date the property is acquired by the taxpayer

Answer 10

original basis

Question 11

Increase the original basis?

Answer 11

capital additions

Question 12

Decrease the original basis?

Answer 12

recoveries of capital

Question 13

Adjusted basis is

determined as follows:

Answer 13

Cost (or other adjusted basis) on date of acquisition
+ Capital additions
− Capital recoveries
= Adjusted basis on date of disposition

Question 14

Capital additions include

Answer 14

the cost of capital improvements and betterments made
to the property by the taxpayer. These expenditures are distinguishable from
expenditures for the ordinary repair and maintenance of the property, which are
neither capitalized nor added to the original basis

Question 15

following are examples

of capital recoveries:

Answer 15

1. Depreciation and cost recovery allowances
2. Casualties and thefts
3. Certain corporate distributions
4. Amortizable bond premium
5. Easements

Question 16

Explain Depreciation and cost recovery allowances

Answer 16

The original basis of depreciable property
is reduced by the annual depreciation charges (or cost recovery allowances) while the property is held by the taxpayer. The amount of depreciation
that is subtracted from the original basis is the greater of the allowed
or allowable depreciation calculated on an annual basis.14 In most circumstances,
the allowed and allowable depreciation amounts are the same (refer to
Chapter 8).

Question 17

Explain Casualties and thefts

Answer 17

A casualty or theft may result in the reduction of the
adjusted basis of property.15 The adjusted basis is reduced by the amount of
the deductible loss. In addition, the adjusted basis is reduced by the amount
of insurance proceeds received. However, the receipt of insurance proceeds
may result in a recognized gain rather than a deductible loss. The gain
increases the adjusted basis of the property

Question 18

The adjusted basis for casualties and thefts is reduced by what amount?

Answer 18

the amount of
the deductible loss. In addition, the adjusted basis is reduced by the amount
of insurance proceeds received. However, the receipt of insurance proceeds
may result in a recognized gain rather than a deductible loss. The gain
increases the adjusted basis of the property

Question 19

Explain corporate distributions?

Answer 19

A corporate distribution to a shareholder that is not
taxable is treated as a return of capital, and it reduces the basis of the shareholder’s
stock in the corporation.17 For example, if a corporation makes a cash
distribution to its shareholders and has no earnings and profits, the distributions
are treated as a return of capital. Once the basis of the stock is reduced to
zero, the amount of any subsequent distributions is a capital gain if the stock is
a capital asset. These rules are illustrated in Example 8 of Chapter 19

Question 20

Explain amortizable bond premium

Answer 20

The basis in a bond purchased at a premium is
reduced by the amortizable portion of the bond premium.18 Investors in taxable
bonds may elect to amortize the bond premium, but the premium on taxexempt
bonds must be amortized.19 The amount of the amortized premium
on taxable bonds is permitted as an interest deduction. Therefore, the election
enables the taxpayer to take an annual interest deduction to offset ordinary
income in exchange for a larger capital gain or smaller capital loss on
the disposition of the bond. No such interest deduction is permitted for taxexempt
bonds.

Question 21

explain Easements?

Answer 21

An easement is the legal right to use another’s land for a special
purpose. Historically, easements were commonly used to obtain rights-of-way
for utility lines and roads. In recent years, grants of conservation easements
have become a popular means of obtaining charitable contribution deductions
and reducing the value of real estate for transfer tax (i.e., estate and gift)
purposes. Likewise, scenic easements are used to reduce the value of land as
assessed for ad valorem property tax purposes.
If the taxpayer does not retain any right to the use of the land, all of the
basis is assigned to the easement. However, if the use of the land is only
partially restricted, an allocation of some of the basis to the easement is
appropriate.

Question 22

is the amount of the realized gain that is included in the taxpayer’s
gross income

Answer 22

recognized gain

Question 23

is the amount of a realized

loss that is deductible for tax purposes

Answer 23

recognized loss

Question 24

In certain cases, a realized gain or loss is not recognized upon the sale or other disposition
of property. One such case involves

Answer 24

nontaxable exchanges, which are covered
later in this chapter. Others include losses realized upon the sale, exchange,
or condemnation of personal use assets (as opposed to business or income-producing
property) and gains realized upon the sale of a residence. In addition, realized
losses from the sale or exchange of business or income-producing property
between certain related parties are not recognized.

Question 25

A realized loss from the sale, exchange, or condemnation of personal use assets
(e.g., a personal residence or an automobile not used at all for business or
income-producing purposes) is recognized for tax purposes?

Answer 25

False It isn’t

Question 26

pervades all of the tax rules relating to property
transactions. The doctrine derives its roots from the very essence of the income
tax—a tax on income.

Answer 26

recovery of capital doctrine

Question 27

Under the recovery of capital doctrine as a general rule a taxpayer is entitled to recover?

Answer 27

the cost or other original basis of property acquired and is not taxed on
that amount.
The cost or other original basis of depreciable property is recovered through annual
depreciation deductions

Question 28

The general guidelines for the relationship between the recovery of capital doctrine
and the realized and recognized gain and loss concepts are summarized as
follows: See page 13-8

Answer 28

.

Question 29

A bargain purchase of property is an exception to the general rule for determining
basis. A bargain purchase may result when (2 things)

Answer 29

an employer transfers property to
an employee at less than the property’s fair market value (as compensation for services)
or when a corporation transfers property to a shareholder at less than the
property’s fair market value (a dividend).

Question 30

The amount included in income either

as compensation for services or dividend income is the difference between

Answer 30

bargain purchase price and the property’s fair market value

Question 31

When a taxpayer acquires multiple assets in a lump-sum purchase, the total cost must be
allocated among the individual assets.28 Allocation is necessary for several reasons:

Answer 31

• Some of the assets acquired may be depreciable (e.g., buildings), while others
may not be (e.g., land).
• Only a portion of the assets acquired may be sold.
• Some of the assets may be capital or § 1231 assets that receive special tax treatment
upon subsequent sale or other disposition.

Question 32

If a business is purchased and goodwill is involved, a special allocation rule
applies. What is it?

Answer 32

Initially, the purchase price is assigned to the assets, excluding goodwill, to
the extent of their total fair market value. This assigned amount is allocated among
the assets on the basis of the fair market value of the individual assets acquired.
Goodwill is then assigned the residual amount of the purchase price. The resultant
allocation is applicable to both the buyer and the seller

Question 33

In the case of nontaxable stock dividends, the allocation depends on whether the
dividend is a common stock dividend on common stock or a preferred stock dividend
on common stock. If the dividend is common on common, the cost of the
original common shares is

Answer 33

allocated to the total shares owned after the dividend

Question 34

If the nontaxable stock dividend is preferred stock on common, the cost of the
original common shares is

Answer 34

allocated between the common and preferred shares on

the basis of their relative fair market values on the date of distribution

Question 35

When a taxpayer receives property as a gift, there is no cost to the donee (recipient).
Thus, under the cost basis provision, the donee’s basis would be

Answer 35

zero. However,
this would violate the statutory intent that gifts not be subject to the income
tax.35 With a zero basis, if the donee sold the property, all of the amount realized
would be treated as realized gain. Therefore, a basis is assigned to the property
received.

Question 36

For gifts a basis is assigned to the property

received depending on the following:

Answer 36

• The date of the gift.
• The basis of the property to the donor.
• The amount of the gift tax paid.
• The fair market value of the property.

Question 37

Gift Basis Rules if No Gift Tax Is Paid. If the donee disposes of gift property in a transaction that results in a gain, the
basis to the donee is

Answer 37

is the same as the donor’s adjusted basis.36 The donee’s basis
in this case is referred to as the gain basis. Therefore, a realized gain results if the
amount realized from the disposition exceeds the donee’s gain basis.

Question 38

Gift Basis Rules if No Gift Tax Is Paid. If the donee disposes of gift property in a transaction that results in a loss, the
basis to the donee is the

Answer 38

lower of the donor’s adjusted basis or the fair market
value on the date of the gift. The donee’s basis in this case is referred to as
the loss basis. Therefore, a realized loss results if the amount realized from the
disposition is less than the donee’s loss basis

Question 39

The ______ _______ for property acquired by gift begins on the date the donor
acquired the property if the gain basis rule applies

Answer 39

holding period

Question 40

The basis of property acquired from a decedent is generally the property’s

Answer 40

fair market
value at the date of death (referred to as the primary valuation amount). The
property’s basis is the fair market value six months after the date of death if the
executor or administrator of the estate elects the alternate valuation date for estate
tax purposes.

Question 41

The
property’s basis is the fair market value six months after the date of death if the
executor or administrator of the estate elects the alternate valuation date for estate
tax purposes. This amount is referred to as the

Answer 41

alternative valuation amount

Question 42

Nancy inherited all of the property of her father, who died in 2012. Her father’s adjusted
basis for the property at the date of death was $650,000. The property’s fair market value
was $3,750,000 at the date of death and $3,760,000 six months after death. What is Nancy’s basis?

Answer 42

The alternate
valuation date cannot be elected because the value of the gross estate has increased during
the six-month period. Nancy’s basis for income tax purposes is $3,750,000

Question 43

Assume the same facts as in Example 27, except that the property’s fair market value
six months after death was $3,745,000. What is nancy’s basis?

Answer 43

If the executor elects the alternate valuation

date, Nancy’s basis for income tax purposes is $3,745,000

Question 44

Assume the same facts as in the previous example, except that the property is distributed
four months after the date of the decedent’s death. At the distribution date, the
property’s fair market value is $3,747,500. Because the executor elected the alternate
valuation date, Nancy’s basis for income tax purposes is

Answer 44

$3,747,500

Question 45

Explain deathbed gifts?

Answer 45

a donor makes a gift of appreciated
property to a dying person with the understanding that the donor (or the donor’s
spouse) will inherit the property upon the donee’s death.

Question 46

What are rules on this?

Answer 46

If the time period between
the date of the gift and the date of the donee’s death is not longer than one year,
the usual basis rule (stepped-up basis) for inherited property may not apply. The
adjusted basis of such property inherited by the donor or his or her spouse from the
donee is the same as the decedent’s adjusted basis for the property rather than the
fair market value at the date of death or the alternate valuation date

Question 47

Both the decedent’s share and the survivor’s share of community property have a basis
equal to

Answer 47

the fair market value on the date of the decedent’s death

Question 48

The holding period of property acquired from a decedent is deemed to be

Answer 48

long term
(held for the required long-term holding period). This provision applies regardless
of whether the property is disposed of at a gain or at a loss

Question 49

Section 267 provides that realized losses from sales or exchanges of property, directly
or indirectly, between certain related parties are not recognized. This loss disallowance
provision applies to several types of related-party transactions. The most common
involve? (2 things)

Answer 49

(1) members of a family and (2) an individual and a corporation in
which the individual owns, directly or indirectly, more than 50 percent in value of
the corporation’s outstanding stock.

Question 50

Specifically, if a taxpayer sells or exchanges
stock or securities and within 30 days before or after the date of the sale or exchange
acquires substantially identical stock or securities, any loss realized from the sale or
exchange is not recognized because the transaction is a

Answer 50

wash sale

Question 51

As discussed previously, losses from the sale of personal use assets are not recognized
for tax purposes, but losses from the sale of business and income-producing
assets are deductible?

Answer 51

True

Question 52

Can a taxpayer convert a personal use asset that has declined
in value to business or income-producing use and then sell the asset to recognize a business or income-producing loss? The tax law prevents this practice by specifying
that the original basis for loss on personal use assets converted to business or incomeproducing
use is the

Answer 52

lower of the property’s adjusted basis or fair market value on
the date of conversion

Question 53

The gain basis for converted property is

Answer 53

the property’s
adjusted basis on the date of conversion. The tax law is not concerned with gains
on converted property because gains are recognized regardless of whether property
is business, income-producing, or personal use

Question 54

Three types of issues tend to complicate the determination of adjusted basis. What are they?

Answer 54

First,
the applicable tax provisions for calculating the adjusted basis depend on how the
property was acquired (e.g., purchase, taxable exchange, nontaxable exchange,
gift, or, inheritance). Second, if the asset is subject to depreciation, cost recovery,
amortization, or depletion, adjustments must be made to the basis during the time
period the asset is held by the taxpayer. Upon disposition of the asset, the taxpayer’s
records for both of these items may be deficient. For example, the donee
does not know the amount of the donor’s basis or the amount of gift tax paid by
the donor, or the taxpayer does not know how much depreciation he or she has
deducted. Third, the complex positive and negative adjustments encountered in
calculating the amount realized are also involved in calculating the adjusted basis

Question 55

In a ______ ________, realized gains or losses are not recognized

Answer 55

nontaxable exchange. However,
the nonrecognition is usually temporary. The recognition of gain or loss is postponed
(deferred) until the property received in the nontaxable exchange is subsequently
disposed of in a taxable transaction. This is accomplished by assigning a carryover
basis to the replacement property.

Question 56

Adjustments to Basis Table is on 13.2

Answer 56

.

Question 57

What is Section 1031 on?

Answer 57

Like-Kind Exchanges

Question 58

Section 1031 provides for nontaxable exchange treatment if the following requirements
are satisfied (3 of them)

Answer 58

• The form of the transaction is an exchange.
• Both the property transferred and the property received are held either for
productive use in a trade or business or for investment.
• The property is like-kind property.

Question 59

include business for business, business for investment,

investment for business, or investment for investment property

Answer 59

like-kind exchanges

Question 60

Property held for
personal use, inventory, and partnership interests (both limited and general) do qualify under the like-kind exchange provisions?

Answer 60

False they do not

Question 61

Do securities qualify for like-kind exchange treatment?

Answer 61

No

Question 62

“The words ‘like-kind’ refer to

Answer 62

the nature or character of the property and not to
its grade or quality. One kind or class of property may not … be exchanged for
property of a different kind or class

Question 63

The term like-kind is intended to be interpreted very broadly. However, three categories
of exchanges are not included.

Answer 63

First, livestock of different sexes do not
qualify as like-kind property. Second, real estate can be exchanged only for other
real estate, and personalty can be exchanged only for other personalty. For example,
the exchange of a machine (personalty) for an office building (realty) is not a
like-kind exchange.

Question 64

Is a machine realty or personalty?

Answer 64

personalty

Question 65

Real estate (or realty) includes

Answer 65

principally rental buildings,

office and store buildings, manufacturing plants, warehouses, and land.

Question 66

Personalty includes

Answer 66

principally machines,

equipment, trucks, automobiles, furniture, and fixtures.

Question 67

real property
located in the United States exchanged for foreign real property (and vice versa)
does qualify as like-kind property

Answer 67

False it does not

Question 68

Another special provision applies if the taxpayers involved in the exchange are
related parties under § 267(b). To qualify for like-kind exchange treatment, the taxpayer
and the related party must not

Answer 68

dispose of the like-kind property received in

the exchange within the two-year period following the date of the exchange

Question 69

The Regulations also provide for greater specificity in determining whether
depreciable tangible personal property is of a like kind or class. Such property held
for productive use in a business is of a like class only if

Answer 69

the exchanged property is
within the same general business asset class (as specified by the IRS in Revenue Procedure
87–57 or as subsequently modified) or the same product class (as specified by
the Department of Commerce)

Question 70

The following are examples of general business asset classes:

Answer 70

• Office furniture, fixtures, and equipment.
• Information systems (computers and peripheral equipment).
• Airplanes.
• Automobiles and taxis.
• Buses.
• Light general-purpose trucks.
• Heavy general-purpose trucks

Question 71

The transaction must involve a direct exchange of property to qualify as a like-kind
exchange. The sale of old property and the purchase of new property, even though
like kind, is generally not an exchange. However, if the two transactions are mutually
dependent, the IRS may treat them as a like-kind exchange. For example, if
the taxpayer sells an old business machine to a dealer and purchases a new one
from the same dealer, like-kind exchange treatment could result?

Answer 71

True

Question 72

The Code provides
that the delayed swap will qualify as a like-kind exchange if the following
requirements are satisfied:

Answer 72

• Identification period. The new property must be identified within 45 days of the
date when the old property was transferred.
• Exchange period. The new property must be received by the earlier of the
following:
• Within 180 days of the date when the old property was transferred.
• The due date (including extensions) for the tax return covering the year of
the transfer.

Question 73

If the taxpayer in a like-kind exchange gives or receives some property that is not
like-kind property, recognition may occur. Property that is not like-kind property,
including cash, is referred to as

Answer 73

boot

Question 74

“property that is

not like-kind property

Answer 74

boot

Question 75

The _______ of boot will trigger recognition of gain if there is realized gain

Answer 75

receipt

Question 76

The receipt of boot will trigger recognition of gain if there is realized gain. The
amount of the recognized gain is the

Answer 76

lesser of the boot received or the realized gain

realized gain serves as the ceiling on recognition

Question 77

The Code provides an alternative approach for determining the basis of likekind
property received:

Answer 77

Adjusted basis of like-kind property surrendered
\+ Adjusted basis of boot given
\+ Gain recognized
− Fair market value of boot received
− Loss recognized
= Basis of like-kind property received
This approach is logical in terms of the

Question 78

Section 1033 provides that a taxpayer who suffers an involuntary conversion of
property may postpone recognition of gain realized from the conversion. The
objective of this provision is to provide relief to the taxpayer who has suffered hardship
and does not have the wherewithal to pay the tax on any gain realized from
the conversion. Postponement of realized gain is permitted to the extent the taxpayer
reinvests the amount realized from the conversion in replacement property.
The rules for nonrecognition of gain are as follows:

Answer 78

• If the amount reinvested in replacement property equals or exceeds the amount
realized, realized gain is not recognized
• If the amount reinvested in replacement property is less than the amount realized,
realized gain is recognized to the extent of the deficiency.

Question 79

An _______ ________ results from the destruction (complete or partial), theft,
seizure, requisition or condemnation, or sale or exchange under threat or imminence
of requisition or condemnation of the taxpayer’s property

Answer 79

involuntary conversion

Question 80

However, if either of the
following requirements is satisfied, the nonrecognition provision of § 1033 applies
to the severance damages:

Answer 80

• The severance damages are used to restore the usability of the remaining
property.
• The usefulness of the remaining property is destroyed by the condemnation,
and the property is sold and replaced at a cost equal to or exceeding the sum
of the condemnation award, severance damages, and sales proceeds.

Question 81

replacement property tests table 13.3 is on 13-36

Answer 81

.

Question 82

Nonrecognition of gain can be either mandatory or elective, depending on

Answer 82

whether

the conversion is direct (into replacement property) or indirect (into money).

Question 83

If the conversion is directly into replacement property rather than into money,
nonrecognition of realized gain is optional?

Answer 83

False it’s mandatory

Question 84

The tax consequences of the involuntary conversion of a personal residence
depend on

Answer 84

whether the conversion is a casualty or condemnation and whether a
realized loss or gain results

Question 85

If the conversion is a condemnation, the realized loss is recognized?

Answer 85

False it isn’t recognized

Question 86

Loss from

the condemnation of a personal use asset is never recognized?

Answer 86

True

Question 87

A taxpayer’s personal residence is a

Answer 87

personal use asset Therefore, a realized loss

from the sale of a personal residence is not recognized

Question 88

The two-year ownership and use requirement and the “only once every two years”
provision could create a hardship for taxpayers in certain situations that are
beyond their control. Thus, under the following special circumstances, the requirements
are waived

Answer 88

• Change in place of employment.
• Health.
• To the extent provided in the Regulations, other unforeseen circumstances.

Question 89

For the health exception to apply, health must be the primary reason for the sale
or exchange of the residence.88 A sale or exchange that is merely beneficial to the
general health or well-being of the individual will not qualify. A safe harbor applies
if there is a physician’s recommendation for a change of residence (1) to obtain,
provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness,
or injury or (2) to obtain or provide medical or personal care for an individual suffering
from a disease, illness, or injury. If the safe harbor is not satisfied, then the
determination is made using a facts and circumstances approach. Examples that
qualify include the following:

Answer 89

• A taxpayer who is injured in an accident is unable to care for herself. She sells
her residence and moves in with her daughter.
• A taxpayer’s father has a chronic disease. The taxpayer sells his house in
order to move into the father’s house to provide the care the father requires
as a result of the disease.
• A taxpayer’s son suffers from a chronic disease. The taxpayer sells his house
and moves his family so that the son can begin a new treatment recommended
by the son’s physician that is available at a medical facility 100 miles away.
• A taxpayer suffers from chronic asthma. Her physician recommends that she
move to a warm, dry climate. She moves from Minnesota to Arizona.

Question 90

For the unforeseen circumstances exception to apply, the primary reason for the
sale or exchange of the residence must be an event the taxpayer did not anticipate
before purchasing and occupying the residence.89 This requirement is satisfied
under a safe-harbor provision by any of the following:

Answer 90

• Involuntary conversion of the residence.
• Natural or human-made disasters or acts of war or terrorism resulting in a casualty
to the residence.
• Death of a qualified individual.
• Cessation of employment that results in eligibility for unemployment
compensation.
• Change in employment or self-employment that results in the taxpayer being
unable to pay housing costs and reasonable basic living expenses for the taxpayer’s
household.
• Divorce or legal separation.
• Multiple births resulting from the same pregnancy.

Question 91

The amount of the available § 121 exclusion on the sale of a principal residence is

Answer 91

250,000 If the realized gain does not exceed $250,000, there is no recognized gain.

Question 92

Realized gain is calculated in the normal manner. The amount realized is

Answer 92

the selling
price less the selling expenses, which include items such as the cost of advertising
the property for sale, real estate broker commissions, legal fees in connection
with the sale, and loan placement fees paid by the taxpayer as a condition of arranging financing for the buyer.

Question 93

If a married couple files a joint return, the $250,000 amount is increased to

Answer 93

$500,000 if the following requirements are satisfied:91
• Either spouse meets the at-least-two-years ownership requirement.
• Both spouses meet the at-least-two-years use requirement.
• Neither spouse is ineligible for the § 121 exclusion on the sale of the current
principal residence because of the sale of another principal residence within
the prior two years.

Question 94

Starting in 2008, a surviving spouse can continue to use the $500,000 exclusion
amount on the sale of a personal residence for the next two years following the
year of the deceased spouse’s death?

Answer 94

True

Question 95

As discussed earlier in Requirements for Exclusion Treatment, partial § 121 exclusion
treatment may be available when not all of the statutory requirements are satisfied.
Under the relief provision, the § 121 exclusion amount ($250,000 or
$500,000) is multiplied by

Answer 95

a fraction, the numerator of which is the number of
qualifying months and the denominator of which is 24 months. The resulting
amount is the excluded gain

Question 96

A vacation home does not qualify for the § 121 exclusion because it does not satisfy
the requirement of being the taxpayer’s principal residence?

Answer 96

True

Question 97

To be eligible for the § 121 exclusion, the residence must have been owned and
used by

Answer 97

the taxpayer as the principal residence for at least two years during the
five-year window (subject to partial exclusion treatment under the relief provision).
Whether property is the taxpayer’s principal residence “depends upon all of the
facts and circumstances in each case

Question 98

A residence does not have to be a house. For example, what can qualify?

Answer 98

a houseboat, a house

trailer, or a motor home can qualify

Question 99

Exchange of Stock for Property—§ 1032

Under § 1032, a corporation

Answer 99

does not recognize gain or loss on the receipt of
money or other property in exchange for its stock (including treasury stock).
In other words, a corporation does not recognize gain or loss when it deals in its
own stock. This provision is consistent with the accounting treatment of such
transactions.

Question 100

Certain Exchanges of Insurance Policies—§ 1035

Under § 1035,

Answer 100

no gain or loss is recognized from the exchange of certain insurance
contracts or policies. The rules relating to exchanges not solely in kind and the basis of the property acquired are the same as under § 1031. Exchanges qualifying
for nonrecognition include the following:
• The exchange of life insurance contracts.
• The exchange of a life insurance contract for an endowment or annuity
contract.
• The exchange of an endowment contract for another endowment contract
that provides for regular payments beginning at a date not later than the date
payments would have begun under the contract exchanged.
• The exchange of an endowment contract for an annuity contract.
• The exchange of annuity contracts.

Question 101

Exchange of Stock for Stock of the Same
Corporation—§ 1036
Section 1036 provides

Answer 101

that a shareholder does not recognize gain or loss on the
exchange of common stock solely for common stock in the same corporation or
from the exchange of preferred stock for preferred stock in the same corporation.
Exchanges between individual shareholders as well as between a shareholder and
the corporation are included.

Question 102

Certain Reacquisitions of Real Property—§ 1038

Under § 1038,

Answer 102

no loss is recognized from the repossession of real property sold on
an installment basis. Gain is recognized to a limited extent.

Question 103

Transfers of Property between Spouses or Incident to
Divorce—§ 1041
Section 1041 provides that

Answer 103

transfers of property between spouses or former spouses incident
to divorce are nontaxable transactions. Therefore, the basis to the recipient is a
carryover basis. To be treated as incident to the divorce, the transfer must be
related to the cessation of marriage or occur within one year after the date on
which the marriage ceases.
Section 1041 also provides for nontaxable exchange treatment on property
transfers between spouses during marriage. The basis to the recipient spouse is a carryover
basis.

Question 104

Rollovers into Specialized Small Business Investment
Companies—§ 1044
A postponement opportunity is available for some sellers of publicly traded securities
under § 1044. If the amount realized is reinvested in the common stock or
partnership interest of a specialized small business investment company (SSBIC),
the realized gain is

Answer 104

not recognized. Any amount not reinvested will trigger recognition
of the realized gain to the extent of the deficiency. The taxpayer must reinvest
the proceeds within 60 days of the date of sale to qualify. In calculating the basis of
the SSBIC stock, the amount of the purchase price is reduced by the amount of the
postponed gain

Question 105

Statutory ceilings are imposed on the amount of realized gain that can be postponed
for any taxable year as follows:

Answer 105

• For an individual taxpayer, the lesser of:
• $50,000 ($25,000 for married filing separately).
• $500,000 ($250,000 for married filing separately) reduced by the amount of
such nonrecognized gain in prior taxable years.
• For a corporate taxpayer, the lesser of:
• $250,000.
• $1 million reduced by the amount of such nonrecognized gain in prior taxable
years.

Question 106

Rollover of Gain from Qualified Small Business Stock into
Another Qualified Small Business Stock—§ 1045
Under § 1045,

Answer 106

realized gain from the sale of qualified small business stock held for
more than six months may be postponed if the taxpayer acquires other qualified
small business stock within 60 days. Any amount not reinvested will trigger the recognition
of the realized gain on the sale to the extent of the deficiency.

Question 107

In calculating
the basis of the acquired qualified small business stock, the amount of the
purchase price is reduced by

Answer 107

the amount of the postponed gain.

Question 108

Qualified small business stock is stock of a qualified small business that is
acquired by

Answer 108

the taxpayer at its original issue in exchange for money or other property
(excluding stock) or as compensation for services

Question 109

A qualified small business is

a domestic corporation that satisfies the following requirements:

Answer 109

• The aggregate gross assets prior to the issuance of the small business stock do
not exceed $50 million.
• The aggregate gross assets immediately after the issuance of the small business
stock do not exceed $50 million.

Question 110

Disallowed Losses

Section 267 Disallowed Losses

Answer 110

This is so even in light of the
provision that permits the related-party buyer to offset his or her realized gain by the related-party seller’s disallowed loss. Even with this offset, several inequities
exist. First, the tax benefit associated with the disallowed loss ultimately is realized by the
wrong party (the related-party buyer rather than the related-party seller). Second, the
tax benefit of this offset to the related-party buyer does not occur until the buyer disposes
of the property. Therefore, the longer the time period between the purchase and
disposition of the property by the related-party buyer, the less the economic benefit.
Third, if the property does not appreciate to at least its adjusted basis to the related-party
seller during the time period the related-party buyer holds it, part or all of the disallowed
loss is permanently lost. Fourth, because the right of offset is available only to the original
transferee (the related-party buyer), all of the disallowed loss is permanently lost if
the original transferee subsequently transfers the property by gift or bequest.

Question 111

The wash sales provisions can be avoided if

Answer 111

the security that was sold is replaced
within the statutory time period with a similar rather than a substantially identical
security. For example, a sale of Dell, Inc. common stock accompanied by a purchase
of Hewlett-Packard common stock is not treated as a wash sale.

Question 112

Because application of the like-kind exchange provisions is mandatory rather than
elective, in certain instances, it may be preferable to

Answer 112

avoid qualifying for § 1031

nonrecognition.

Question 113

If the like-kind exchange provisions
do not apply, the end result may be the recognition of capital gain in exchange for
a higher basis in the newly acquired asset. Also, the immediate recognition of gain
may be preferable in certain situations. Examples where immediate recognition is
beneficial include the following:

Answer 113

• Taxpayer has unused net operating loss carryovers.
• Taxpayer has unused general business credit carryovers.
• Taxpayer has suspended or current passive activity losses.

Question 114

Qualification for § 121 Exclusion
The key requirement for the § 121 exclusion is that the taxpayer must have owned and used
the property as a principal residence for at least two years during the five-year window. As
taxpayers advance in age, they quite frequently make decisions such as the following:

Answer 114

• Sell the principal residence and buy a smaller residence or rent the principal
residence.
• Sell vacation homes they own.
• Sell homes they are holding as rental property