Chapter 13 T/F

Question 1

Realized gain includes economic gain that a taxpayer obtains from the sale or exchange of property.

Answer 1

True

Question 2

Whenever a realization of gain or loss occurs, the transaction is taxable in that year.

Answer 2

False. Realization of gain does not always trigger immediate taxation. The gain that is realized must be recognized for tax purposes in order to have an immediate tax effect reportable in the current taxable year. Gain that is realized but not recognized may be deferred to some later time.

Question 3

The “amount realized” on a sale of property is the same as the gain realized.

Answer 3

False. The amount realized is the value of all cash or property received for the asset transferred. Realized gain is calculated by subtracting the transferred asset’s basis from the amount realized.

Question 4

It is necessary to determine the basis of property in order to calculate the amount of gain or loss on a sale or other disposition of the property.

Answer 4

True

Question 5

Losses on the sale of property are generally not deductible unless the transaction was in connection with a trade or business or an activity entered into for profit.

Answer 5

True

Question 6

When gain on property is not recognized but postponed to a future time, the property receives a stepped-up basis equal to its fair market value.

Answer 6

False. When recognition of gain or loss on an exchange is postponed to a future time, the property received takes a substituted basis.

Question 7

The basis of property acquired by gift is determined by reference to the donor’s basis in the same property.

Answer 7

True

Question 8

Property acquired as compensation for services has a basis equal to its fair market value at the time of acquisition.

Answer 8

True

Question 9

When a taxpayer acquires property subject to a mortgage loan, the taxpayer’s basis in the property will be the value of his or her equity in the property.

Answer 9

False. When property is acquired subject to a mortgage, the taxpayer’s basis becomes the entire cost of the property, consisting of the taxpayer’s equity plus the amount of the mortgage.

Question 10

A taxpayer who inherits property from a decedent will assume the decedent’s adjusted basis in the property.

Answer 10

False. A taxpayer who receives property from a decedent receives a new basis stepped up to the fair market value of the property on either the date of the decedent’s death or the alternate valuation date (6 months after death) if that date is elected by the executor for federal estate tax purposes.

Question 11

A person who makes a gift of appreciated property to a decedent within 1 year of death and then inherits that property from the decedent will be denied the stepped-up basis normally available for transfers of property passing at death.

Answer 11

True

Question 12

Death beneficiaries under nonqualified annuity contracts are generally not eligible for a basis step-up with respect to such contracts.

Answer 12

True

Question 13

Depreciation deductions result in a basis adjustment to the property that is depreciated.

Answer 13

True

Question 14

An exchange of General Motors stock valued at $15,000 for a General Motors auto valued at $15,000 is treated as a like-kind exchange that will allow taxation of gain to be postponed.

Answer 14

False. An exchange of stock for an auto of equal value is not a qualifying transaction under the like-kind exchange provisions. Therefore the gain on such an exchange is recognized to the extent of the gain realized.

Question 15

Nontaxable exchanges occur when property is exchanged solely for other property of like kind.

Answer 15

True

Question 16

When property is exchanged for other like-kind property plus cash, the transaction is a fully nontaxable exchange and any gain is deferred to a future date.

Answer 16

False. When like-kind property is exchanged for other like-kind property plus cash, the transaction is partially taxable, and gain must be recognized to the extent of the cash (boot) received.

Question 17

n a like-kind exchange, the basis of property received is determined by reference to the basis of the property given up, with adjustments to reflect recognition of gain or loss and the transfer of boot.

Answer 17

True

Question 18

An annuity contract may be exchanged for a life insurance contract in a tax-free exchange

Answer 18

False. Insurance contracts are eligible for tax-free exchanges subject to certain restrictions. A life insurance contract may be exchanged for another life contract or an endowment or an annuity contract. However, an annuity contract can only be exchanged for another annuity contract. An annuity contract cannot be exchanged tax free for a life insurance contract.

Question 19

Taxpayers who have resided in a nursing home for any period during the 5 years prior to the sale of a home may not exclude gain from the sale of the home.

Answer 19

False. Taxpayers may treat nursing home stays as “use” of their principal residence for up to 1 year of the 2-out-of-5-year use requirement. Therefore a nursing home stay does not disqualify a taxpayer from the exclusion.

Question 20

For purposes of the exclusion of gain from the sale of a personal residence, married taxpayers filing jointly may exclude up to $500,000 where both spouses meet the use requirement and one spouse meets the ownership requirement.

Answer 20

True