Chapter 7 Flashcards
Shomit purchases 100 shares of stock in Classy Corporation for $500 in Year 1. On December 20 of Year 2, Shomit sells the 100 shares acquired for $410. On December 27 of Year 2, he purchases an additional 100 shares in the company for $400. What is Shomit’s resulting basis in the shares acquired on December 27 of Year 2?
Group of answer choices
$400
$500
$490
$410
$490
This question is about wash sale, see Slide22:
“Wash sale occurs when taxpayer disposes of stock or securities at loss and acquires substantially identical stock or securities within 30 days before or after the date of the loss sale. Disallowed loss is added to the basis of the substantially identical stock or securities that caused the disallowance.”
For this question, on December 20 of Year 2, Shomit sells the 100 shares acquired for $410. It is a loss sale. The loss is $90 [$410-$500] .
On December 27 of Year 2, he purchases an additional 100 shares in the company for $400. He purchases the substantially identical stock within 30 days after the date of the loss sale. This is a wash sale. The loss of $90 is disallowed and is added to the basis of the 100 shares he repurchased. So the basis in the shares acquired on December 27 of Year 2 is $400+$90=$490.
Mikhail owns real estate with a basis of $400,000 and a fair market value of $650,000. He exchanges it for other real estate with a fair market value of $480,000. In addition, Mikhail is relieved of a mortgage on the old property of $200,000, assumes a mortgage on the new property of $100,000, and receives $70,000 in cash. Under Code Section 1031, what is Mikhail’s recognized gain on the exchange?
Group of answer choices
$170,000
$270,000
$70,000
$350,000
First, let’s figure out how much net boot Mikhail received. When considering boot, we take the net boot. In this question, there are three boots: 1) the cash received of $70,000, 2) Mortgage Relief of $200,000 (received) and 3) Mortgage assumption of $100,000 (given).
$70,000+$200,000 (received)
-$100,000 (given)
net boot= $170,000
Then, let’s compute gain/loss realized:
AR = Loan relief + boot received + FMV of new asset
= $200,000 + $70,000 + $480,000 = $750,000
AB = Old basis + Loan on the new asset
= $400,000 + $100,000 = $500,000
Gain realized = $250,000
Then, let’s compute gain/loss recognized:
The recognized gain is the lesser of realized gain ($250,000) or net boot received ($170,000). Thus, the recognized gain is $170,000.
Then, let’s compute Mikhail’s basis in the new asset:
The portion of the realized gain that is not recognized (and thus deferred) is $80,000 ($250,000-$170,000). We want to make sure Mikhail has $80,000 gain when he sells the newly received assets. Since the FMV of the property he received is $480,000 and he has deferred $80,000 of gains, his basis in the new property will be $400,000.
Kellye purchased her home in 2011 for $140,000. After living in it for five years, she sold it in 2016 for $170,000, its market value. What is the tax treatment of the sale of Kellye’s home?
Group of answer choices
A $30,000 gain is recognized, but not reported.
A $30,000 gain is recognized and reported.
A $30,000 gain is carried forward.
No gain is recognized.
It is better if you solve these questions simply by figuring out Amount Realized and Adjusted Basis and then compare the two.
Amount Realized is the value of everything the seller receives: $170,000 in this case.
Adjusted Basis is the cost of everything the seller sold: $140,000 in this case (the cost of the improvements is part of the cost of the house).
When you measure those two against each other you will have a Gain Realized (purely economical) of $30,000.
The next step is to figure out if the Realized Gain must be recognized (whether it’s taxable). In this case, the gain is not recognized (not taxable) because of the exclusion under Section 121.
Benito bought a copy machine in March 2017 for $3,000. In May 2019 he exchanged the copy machine in a like-kind exchange for another copy machine with a FMV of $4,000. In June 2019, he sold the copy machine he had just received for $4,200. What is Benito’s gain/loss from the sale?
Group of answer choices
$1,200 short-term gain
$200 short-term gain
$1,200 long-term gain
No gain/loss is recognized
This is a 1031 exchange. In a 1031 exchange, the holding period “tacks” (transfers). Therefore, Benito has a long-term holding period in the new copy machine. As for the basis, the old basis will simply carry over to the new asset. Therefore, Benito will have a basis of $3,000 in the new copy machine. When he sells the copy machine for $4,200, he will have $1,200 of long-term gains.
Bobby and Betty Bennett sold for $450,000 in October of 2013 their primary residence that they had purchased in 2003 for $200,000. They made major capital improvements during their 10-year ownership totaling $40,000. What is their recognized gain?
Group of answer choices
$250,000
$210,000
$0
$450,000
$0
As Maryam explained, it is the same scenario:
They owned and used the property as a principal residence for 10 years so qualify for the exclusion
The adjusted basis is: the original cost plus (+)capital additions less(- )capital recoveries.
Capital additions:
Cost of improvements and betterments to the property that are capital in nature and not currently deductible.
Capital recoveries:
Depreciation, amortization, depletion, casualty and theft losses.
In this case, Bobby and Betty had purchased in 2003 for $200,000. They made major capital improvements during their 10-year ownership totaling $40,000.
So:
AB=200000+40000=240000
AR 450000
AB 240000
GR 210000
Amount and tax effect of the exclusion: $250,000 (Married individuals filing jointly may exclude up to $500,000.)
They are married so up to 500000 is exclude :
210000 is less than $500000. So there is no recognized gain
Bobby and Betty Bennett sold for $800,000 in October of 2013 their primary residence that they had purchased in 2003 for $200,000. They made major capital improvements during their 10-year ownership totaling $40,000. What is their recognized gain??
Group of answer choices
$560,000
$500,000
$310,000
$60,000
First check qualifying for the exclusion in slide #5.
They owned and used the property as a principal residence for 10 years so qualify for the exclusion
The adjusted basis is: the original cost plus (+)capital additions less(- )capital recoveries.
Capital additions:
Cost of improvements and betterments to the property that are capital in nature and not currently deductible.
Capital recoveries:
Depreciation, amortization, depletion, casualty and theft losses.
In this case, Bobby and Betty had purchased in 2003 for $200,000. They made major capital improvements during their 10-year ownership totaling $40,000.
So:
AB=200000+40000=240000
AR 800000
AB 240000
GR 560000
Amount and tax effect of the exclusion: $250,000 (Married individuals filing jointly may exclude up to $500,000.)
They are married so up to 500000 is exclude :
560000-500000=60000 recognized gain
Greg Grotto exchanged an eight-unit apartment building for a four-unit apartment building. His adjusted basis for the eight-unit building was $320,000 and the fair market value was $400,000. The fair market value of the four-unit building he received, which was subject to a $40,000 mortgage, was $440,000 on the date of the transaction. How much gain does Greg need to recognize?
Group of answer choices
$120,000
$80,000
$48,000
$0
The debt is indeed boot, but in this case it is boot given not received because Greg assumed the debt. The issue here is that we are dealing with a 1031 exchange. Whatever gain we have ($80,000) is deferred because of the like-kind rules. In a like-kind exchange, gain is recognized only to the extent of the lesser of:
(a) boot received ($0 because he didn’t receive any boot)
(b) gain realized ($80,000)
The lower of the two is obviously zero.
Brian Bush and Charles Chex exchange business machines. Brian gives Charles a machine with a basis of $3,500 (fair market value $3,000) plus $2,000 in cash. Charles gives Brian a machine with a basis of $5,000 and a fair market value of $5,000. What is Charles’s recognized gain and his basis in the new machine?
Group of answer choices
$2,000 and $5,000
$500 and $3,500
$1,000 and $5,000
$0 and $3,000
The question is about Charles.
What is the FMV of everything Charles received?
Amount Realized 5000 (cash+FMV of machine received)
What is the AB of everything Charles gave?
Adjusted Basis $5,000 (his old machine)
AR 5000
AB 5000
GR 0
Charles will not recognize gain because he doesn’t have any gain.
The next part is, what is Charles’ basis in his new machine. Here is how you look at it. In a 1031 exchange, your “old” basis transfers over. His “old” basis was $5,000 and that basis will transfer over. However, here we have a little problem. Charles also received $2,000 of cash. That cash is not free money. Cash always has a basis of 1-to-1. Where does the basis in the cash come from? We will take it from the basis in the machine. Therefore, his basis in the machine will be $3,000 ($5000-2000).
David Drummond and Edward Engels exchange business cars. David gives Edward a car with a basis of $15,000 and a fair market value of $21,500. David receives from Edward a car with a basis of $12,500 (fair market value of $17,000) and $4,500 cash. What is David’s recognized gain and basis in the new car?
Group of answer choices
$6,500 and $17,000
$4,500 and $15,000
$0 and $10,500
$2,000 and $12,500
You should always work these questions following this model:
Who is the question about? Is it about Edward or David?
It’s about David.
What is the value of everything David has received?
AR $21,500 (value of car received plus cash)
What is the basis David had in everything he gave?
$15,000 (basis in his old car)
AR 21,500
AB 15,000
GR 6,500
In a 1031 exchange, gain is recognized to the extent of the lesser of:
(a) boot received ($4,500);
(b) gain realized ($6,500).
Therefore, David will recognize $4,500 of gains.
David had economic (realized) gains of $6,500 but paid tax only on $4,500. What about the remaining $2,000?
The remaining $2,000 of gain is preserved in his new asset. He will eventually recognize those gains when he sells his new asset. We will make sure that his basis in the new asset has $2,000 of gain in it. The value of his new car is $17,000 and we must make sure we build in $2,000 of gains. Therefore, we will give him a basis of $15,000.
Therefore, David recognizes $4,500 of gains and takes a basis of $15,000 in his new car.
Jeff Jordan exchanges a truck used in his business plus $20,000 cash for a new truck with a fair market value of $34,000. His adjusted basis in the old truck is $16,000 and its fair market value is $14,000. What is Jeff’s recognized gain or loss and the basis in the new truck?
Group of answer choices
$0 and $34,000
$20,000 gain and $16,000
$0 and $36,000
$2,000 loss and $34,000
The question is about Jeff.
What is the FMV of everything Jeff received?
Amount Realized 34000 (FMV of truck received)
What is the AB of everything Jeff gave?
Adjusted Basis $36,000 ($20,000 cash plus old truck with a basis of $16,000)
AR 34000
AB 36000
LR 2000
Jeff has a realized loss of $2,000 but losses are never recognized in 1031 exchanges. Jeff will not recognize his loss. The loss will be preserved. How? He will take the new truck (worth $34,000) with a basis of $36,000. That way, when he later sells the new truck, he will recognize the $2,000 loss.
Therefore, the answer is $0 loss is recognized now and Jeff has a basis of $36,000 in the new truck.
A fire destroyed Carl Cramer’s business automobile. Carl originally paid $24,000 for the automobile and up to the time of the fire had been allowed $15,000 in depreciation. Within three months the insurance company replaced the old automobile with a new one which was worth $21,000. What is the basis of the new automobile for purposes of computing depreciation?
Group of answer choices
$3,000
$9,000
$15,000
$21,000
$9,000
Arthur Austen’s property having an adjusted basis of $68,000 is condemned by the state government. The authorities replace his property with other qualified property which cost them $100,000. What is Arthur’s basis in the new property?
Group of answer choices
$32,000
$0
$68,000
$100,000
0
Carl Cooper’s factory with a basis of $580,000 and FMV of $620,000 is destroyed by a fire. The insurance proceeds are $550,000. He replaces the factory at a cost of $600,000. What is Carl’s recognized gain or loss?
Group of answer choices
$30,000 loss
$20,000 gain
$50,000 loss
$0 gain or loss
0Question 13: Insurance proceeds are lower than the taxpayer’s AB. Taxpayer took all of the insurance proceeds and added $50,000 to buy replacement property
Taxpayer must recognize a $30,000 loss because insurance proceeds were lower than his AB. Taxpayer cannot have gain because he reinvested all insurance proceeds. The taxpayer has a cost basis in his replacement property ($600,000).
Carl Cooper’s factory with a basis of $580,000 and FMV of $620,000. The insurance proceeds are $620,000. He replaces the factory at a cost of $610,000. What is Carl’s recognized gain or loss?
Group of answer choices
$30,000 loss
$10,000 gain
$50,000 loss
$0 gain or loss
Question 14: Insurance proceeds are higher than the taxpayer’s AB. Taxpayer did not reinvest all the insurance proceeds but instead pocketed $10,000.
Taxpayer has a realized gain of $40,000 (620,000-580,000). Taxpayer must recognize only $10,000 of those gains because that’s what he pocketed. The rest is deferred because it was reinvested in replacement property. The taxpayer’s basis will be his old basis ($580,000).
Carl Cooper’s factory with a basis of $580,000 and FMV of $620,000. The insurance proceeds are $620,000. He replaces the factory at a cost of $630,000. What is Carl’s recognized gain or loss? What is the basis in the new factory?
Group of answer choices
$30,000 loss
$20,000 gain
$50,000 loss
$0 gain or loss
Question 15: Insurance proceeds are higher than the taxpayer’s AB. Taxpayer took all of the insurance proceeds and added $10,000 to buy replacement property.
Taxpayer cannot have gain because he reinvested all insurance proceeds. The taxpayer’s basis will be his old basis plus the additional amount he invested out of pocket (580,000+10,000=590,000)
