M2 Taxable and Nontaxabale Dispositions

Question 1

MCQ-06530
Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. Two months later, Winkler sold the stock on February 15 for $7,500. What is the amount that Winkler should recognize as gain on the sale of stock?

Answer 1

$2,500

The adjusted basis of the stock to Winkler was the $5,000 fair market value atthe time of transfer (that same amount will be considered compensation in the form of property). The
proceeds from the sale were $7,500. The gain on the sale of the stock was thus $2,500. The $4,000 adjusted basis of the stock to Thompson is irrelevant. Note that there is no “gift” here even though the word “gave” was used in the question.

Question 2

MCQ-11069
Decker, a 62-year-old single individual, sold his principal residence for the net amount of $500,000 after all selling expenses. Decker bought the house 15 years ago and occupied it until it was sold. The house had a cost basis of $200,000. Within six months, Decker purchased a new house for $600,000. What amount of gain should Decker recognize from the sale of the residence?

Answer 2

$50,000

Decker’s gain on the sale is $300,000 ($500,000 amount realized − $200,000 cost basis). Decker’s eligible exclusion from this gain is $250,000 because the property was the taxpayer’s personal residence for at least two of the prior five years. Decker’s recognized gain is $50,000 ($300,000 gain on sale less $250,000 homeowner’s exclusion).

Question 3

MCQ-01871
Ryan, age 57, is single with no dependents. On July 1 of the current year, Ryan’s principal residence was sold for the net amount of $500,000 after all selling expenses. Ryan bought the house 35 years ago and occupied it until sold. On the date of sale, the house had a basis of $180,000. What is the
maximum exclusion of gain on sale of the residence that may be claimed in Ryan’s current year income tax return?

Answer 3

$250,000

$250,000 maximum exclusion from taxable income.
An individual may exclude from income up to $250,000 gain provided that the property was the taxpayer’s primary residence for 2 of the last 5 years (and no nonqualified use after January 1, 2009, exists). Married filing jointly taxpayers may exclude gains up to $500,000.

Question 4

MCQ-01871
Ryan, age 57, is single with no dependents. On July 1 of the current year, Ryan’s principal residence was sold for the net amount of $500,000 after all selling expenses. Ryan bought the house 35 years ago and occupied it until sold. On the date of sale, the house had a basis of $180,000. What is the
maximum exclusion of gain on sale of the residence that may be claimed in Ryan’s current year income tax return?

Answer 4

$250,000

$250,000 maximum exclusion from taxable income.
An individual may exclude from income up to $250,000 gain provided that the property was the taxpayer’s primary residence for 2 of the last 5 years (and no nonqualified use after January 1, 2009, exists). Married filing jointly taxpayers may exclude gains up to $500,000.

Question 5

MCQ-01671
In December, Year 10, Davis, a single taxpayer, purchased a new residence for $200,000. Davis lived in the new residence continuously from Year 10 until selling the new residence in July, Year 17, for $455,000. What amount of gain is recognized from the sale of the residence on Davis’ Year 17 tax return?

Answer 5

$5,000

Selling price 455,000
Less: basis (200,000)
Realized gain 255,000
Less: excluded amount (250,000)
Recognized gain $5,000

Question 6

MCQ-08440
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for seven years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker’s recognized gain?

Answer 6

$0

This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two of the last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $85,000 ($165,000 selling price – $70,000 adjusted basis – $10,000 selling expenses). All of the realized gain is excluded, and none of it is recognized.

Question 7

MCQ-06907
A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home for $650,000 and paid $36,000 in real estate commissions. What gain should the couple recognize on their joint return?

Answer 7

$0

Taxpayer’s Basis: 300,000 Purchase price
40,000 Improvements
36,000 Real estate commissions
376,000 Total Ending basis total

Sales Price: 650,000
Gain on sale: 274,000 Under allowed $500,000 exclusion for married couple

Question 8

MCQ-04860
Chris and Jennifer purchased their home in California on January 15, Year 1, for $160,000. During their ownership they made no capital improvements. On August 1, Year 4, the couple moved to Virginia from California and rented out that home. On June 30, Year 6; the couple contracted to sell the California rental home for $437,500. For the calendar Year 6, the couple will file a joint tax return. Disregarding any depreciation recapture rules, how should they treat the sale of the home for tax purposes?

Answer 8

Realized gain of $277,500; not taxable due to the home exclusion.

Disregarding any depreciation recapture, Chris and Jennifer have a realized gain of $277,500. For tax purposes, this gain will not be recognized on their Year 6 tax return as it is
excludable under the homeowner’s exclusion. To qualify for the full exclusion of $500,000 for a joint return, the taxpayers must own and use the home as the principal residence for two years out of the five-year period ending on the date of the sale or exchange.

Question 9

MCQ-08459
Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:

$400,000 for the building
$100,000 for lost profits during rebuilding

Prime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime?

Answer 9

$150,000

The building had an adjusted basis of $350,000 and $400,000 proceeds were received for it. That results in a taxable gain of $50,000, because none of it was deferred. The $100,000 received for lost profits is taxable since profits would have been taxable had they been received. The total taxable amount is $150,000 ($50,000 + $100,000).

Question 10

MCQ-04116
Dawson, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson’s basis in the new warehouse?

Answer 10

$75,000

Insurance proceeds 195,000
Adjusted basis of old warehouse (75,000)
Realized gain 120,000
Gain recognized (excess of insurance proceeds of $195,000 over amount reinvested of $167,000) $28,000
Gain not recognized $92,000
Cost of new warehouse $167,000
Less gain not recognized (from above) (92,000)
Total Basis of new warehouse $75,000

Question 11

MCQ-01850
On December 31 of the current year, a building owned by Pine Corp. was totally destroyed by fire. The building had fire insurance coverage up to $500,000. Other pertinent information as of December 31 of the current year follows:

Building, adjusted basis 520,000
Building, fair market value 550,000
Removal and cleanup cost 10,000

During January of the following year, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion?

Answer 11

$530,000

Adjusted basis of building 520,000
Removal and cleanup cost 10,000
Total Basis of involuntary conversion 530,000

Question 12

MCQ-14926
A taxpayer’s property with an adjusted basis of $75,000 and fair market value of $105,000 was condemned by the state. The taxpayer received $100,000 from the state as compensation for the property, and six months after the condemnation purchased a replacement property for $100,000. What are the tax consequences of this transaction?

Answer 12

No gain is recognized, and the basis in the new property is $75,000.

Condemnation proceeds $100,000
Basis in condemned property (75,000)
Gain realized 25,000
Gain recognized (0)
Gain deferred $ 25,000
Cost of replacement property $100,000
Gain deferred (25,000)
Basis of new property $ 75,000

Question 13

MCQ-08205
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?

Answer 13

Apartment building for unimproved land.

Real property exchanged for other real property will be classified as a like-kind exchange (unless the property is in different countries).

Question 14

MCQ-01742
In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:

Answer 14

Rental real estate located in different states.

No taxable gain or loss will be recognized on a like-kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like‑kind
exchange.

Question 15

MCQ-06416
A taxpayer is trading real property used solely for business purposes for new real property to be
used in his business. The real property originally cost $35,000 and he has taken $12,000 in
depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer
wants in exchange is only worth $16,500. The other party agrees to give the taxpayer $3,500 in cash
in addition to the new real property. What is the gain or loss realized by the taxpayer on this
transaction?

Answer 15

$3,000 loss

Gain/loss realized
= Amount realized (Fair market value of new real property + Boot received) − Adjusted basis of real property given up
= ($16,500 fair market value of new real property + $3,500 cash boot) − $23,000 adjusted basis of the old real property ($35,000 cost − $12,000 accumulated depreciation)
= $3,000 realized loss

Question 16

MCQ-06417
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $12,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer $3,500 in cash in addition to the new real property. What is the gain or loss recognized by the taxpayer on this transaction?

Answer 16

$0

Gain/loss realized
= Amount realized (FMV of real property received + Boot received) − Adjusted basis of real property given up
= $20,000 amount realized ($16,500 fair market value of new real property + $3,500 cash boot received) − $23,000 adjusted basis of the old real property ($35,000 cost − $12,000 accumulated depreciation)
= $3,000 realized loss

Gain/loss
recognized
= $0 (Realized loss is never recognized in like-kind exchanges.)

Question 17

MCQ-06418
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $12,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer $3,500 in cash in addition to the new real property. What is the taxpayer’s basis in the new real property received?

Answer 17

$19,500

Gain/loss realized = Amount realized (FMV of real property received + Boot received) − Adjusted basis of real property given up
= $20,000 amount realized ($16,500 fair market value of new real property + $3,500 cash boot) − $23,000 adjusted basis of the old real property ($35,000 cost − $12,000 accumulated depreciation) = $3,000 realized loss

Gain/loss recognized = $0 (Realized loss is never recognized in like-kind exchanges.)
Loss deferred = $3,000 ($3,000 loss realized − $0 loss recognized)
Basis of new property = FMV of property received − Deferred gain + Deferred loss

= $16,500 − $0 + $3,000
= $19,500

Question 18

MCQ-06423
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer
wants in exchange is worth $22,000. The taxpayer is also assuming a liability secured by the new real property of $2,000. What is the gain or loss recognized by the taxpayer on this transaction?

Answer 18

$0

Gain/loss realized = Amount realized (FMV of real property received) – Adjusted basis of real property given up – Boot paid (liability assumed)
= $22,000 amount realized (FMV of new real property) – $17,000 adjusted basis of old property ($35,000 cost – $18,000
accumulated depreciation) – $2,000 boot paid (liability assumed)
= $3,000 gain realized
Gain/loss recognized = $0 (lesser of realized gain of $3,000 or boot received of $0)

Question 19

MCQ-06424
A taxpayer is trading real property used solely for business purposes for new real property to be
used in his business. The real property originally cost $35,000 and he has taken $18,000 in
depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer
wants in exchange is worth $22,000. The taxpayer has agreed to assume a liability of $2,000 in
addition to the trade-in. What is the taxpayer’s basis in the new real property received?

Answer 19

$19,000

Gain/loss realized = Amount realized (FMV of real property received) − Adjusted basis of rea given up − Boot paid (liability assumed)
= $22,000 amount realized (FMV of new real property) − $17,000 adjusted basis of old property ($35,000 cost − $18,000 accumulated depreciation) − $2,000 boot paid (liability assumed)
= $3,000 gain realized

Gain/loss recognized = $0 (lesser of realized gain of $3,000 or boot received of $0)
Gain deferred = $3,000 ($3,000 gain realized − $0 gain recognized)
Basis of new property = FMV of property received − Deferred gain + Deferred loss
= $22,000 − $3,000 + $0
= $19,000

Question 20

MCQ-06425
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $17,500. The other party also agrees to assume a liability from the taxpayer secured by the old real property of $2,500. What is the gain or loss realized by the taxpayer on this transaction?

Answer 20

$3,000 gain

Gain/loss realized = Amount realized [FMV of real property received + Boot received (relief from liability)] – Adjusted basis of real property given up
= $20,000 amount realized ($17,500 FMV of new real property + $2,500 relief from liability boot received) − $17,000 adjusted
basis of the old real property ($35,000 cost − $18,000 accumulated depreciation)
= $3,000 gain realized

Question 21

MCQ-06426
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $17,500. The other party also agrees to assume a liability from the taxpayer secured by the old real property of $2,500. What is the gain or loss recognized by the
taxpayer on this transaction?

Answer 21

$2,500 gain

Gain/loss realized = Amount realized [FMV of real property received + Boot received (relief from liability)] – Adjusted basis of real property given up
= $20,000 amount realized ($17,500 FMV of new real property + $2,500 relief from liability boot received) − $17,000 adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation)
= $3,000 gain realized

Gain/loss recognized = $2,500 [the lesser of $3,000 realized gain or $2,500 relief from liability (boot received)]

Question 22

MCQ-06427
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $17,500. The other party also agrees to assume a liability from the taxpayer secured by the old real property of $2,500. What is the taxpayer’s basis in the new real property received?

Answer 22

$17,000

Gain/loss realized
= Amount realized [FMV of real property received + Boot received (relief from liability)] – Adjusted basis of real property given up
= $20,000 amount realized ($17,500 FMV of new real property + $2,500 relief from liability boot received) − $17,000 adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation)
= $3,000 gain realized
Gain/loss recognized
= $2,500 [the lesser of $3,000 realized gain or $2,500 relief from liability (boot received)]
Gain deferred = $500 ($3,000 gain realized − $2,500 gain recognized)
Basis of new property
= FMV of property received − Deferred gain + Deferred loss
= $17,500 − $500 + $0
= $17,000

Question 23

MCQ-08612
Benson exchanged real property, used exclusively for business and with an adjusted basis of $100,000, for new real property with a fair market value of $120,000 and received $5,000 in cash. What amount of gain did Benson recognize from the transaction?

Answer 23

$5,000

Realized gain is $25,000 ($125,000 FMV of new property + Cash received less $100,000 adjusted basis of old property). The realized gain is recognized up to boot received. The
$5,000 cash received is boot. Therefore, $5,000 gain is recognized.

Question 24

MCQ-15830
A taxpayer received an investment property from a former spouse as a result of a divorce. The former spouse had purchased the property for $100,000 several years before they got married, and the fair market value of the property was $175,000 at the time of the divorce. One year after receiving the property, the taxpayer obtained a loan secured by the property in the amount of $50,000. One year after obtaining the loan, the taxpayer sold the property for $190,000 and used the proceeds to repay the loan. What amount is the taxpayer’s recognized tax gain from the sale of the property?

Answer 24

$90,000

The taxpayer’s recognized tax gain from the sale of the property is $90,000 ($190,000 sales price less the $100,000 basis). In a divorce property settlement, the recipient
spouse’s basis of the investment property is the carryover basis (basis in the hands of the former spouse).

Question 25

MCQ-12515
A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction
qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer’s tax return for this exchange?

Answer 25

$110,000

In a qualified like-kind exchange, the gain recognized is the lesser of the gain realized or boot received. Boot is non-like-kind property, which includes cash, relief from liabilities,
and nonqualifying property.

Fair market value (FMV) of new parcel of land $200,000
Plus: boot received ($35,000 cash + $75,000 debt relief) 110,000
Amount realized 310,000
Less: adjusted basis of parcel of relinquished land (120,000)
Gain realized 190,000

Question 26

MCQ-06906
Hogan exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the real property. What taxable gain should Hogan recognize?

Answer 26

$3,000

In a like-kind exchange, if property other than property qualifying for such exchange is received, (e.g., “boot”), the transaction produces recognized gain. The recognized gain
is the lower of realized gain or the boot received. Relief from debt is classified as “boot,” so the total boot received is $3,000 ($1,000 cash + $2,000 debt relief). $83,000 amount realized ($80,000 FMV of new property + $3,000 boot received) – $70,000 adjusted basis of old property ($100,000 cost –
$30,000 accumulated depreciation) = $13,000 gain realized. Gain recognized = $3,000 (lesser of $13,000 gain realized and $3,000 boot received).

Question 27

MCQ-08963
A taxpayer owned a rental home with an $85,000 fair market value, a $70,000 adjusted basis, and a $60,000 mortgage. The taxpayer exchanged the rental home for $12,000 in cash plus a rental property with a $65,000 fair market value and a $52,000 mortgage. What amount of gain, if any, must be recognized by the taxpayer on the exchange?

Answer 27

$15,000

The rental properties are real property used in a trade or business, so the exchange qualifies for like-kind exchange nonrecognition treatment. Any gain is recognized to the
extent of boot, or non-like-kind property, received. If there is both debt relief and debt assumed, the debt is netted together (“net the debt”). Net debt relief is boot received and net debt assumed is boot paid.

Fair market value of new property received $ 65,000
+ Cash boot received 12,000
+ Net debt relief boot received:
($60,000 debt relief – $52,000 debt assumed) 8,000
Total amount realized 85,000
– Adjusted basis of property given up (70,000)
Gain realized $ 15,000

Question 28

MCQ-11067
In the current year, Vinton exchanged unimproved land for an apartment building. The land had a basis of $300,000, a fair market value (FMV) of $420,000, and was encumbered by a $100,000 mortgage. The apartment building had an FMV of $550,000 and was encumbered by a $230,000 mortgage. Each party assumed the other’s mortgage. What is Vinton’s basis in the apartment building?

Answer 28

$430,000

Exchange of real property used in a trade/business or held for investment for other real property used in a trade/business or held for investment qualifies for like-kind exchange nonrecognition treatment. Any gain is recognized to the extent of boot (non-like-kind property) received. If there is both debt relief and debt assumed, the debt is netted together (“net the debt”). Net debt relief is boot received and net debt assumed is boot paid. The basis in the new property is the FMV of the new property reduced by any gain deferred.

Fair market value of new apartment building received $550,000
– Adjusted basis of unimproved land given up (300,000)
– Net debt assumed boot paid ($230,000 debt assumed – $100,000 debt relief) (130,000)
Gain realized $120,000
Gain recognized (lesser of $120,000 gain realized and $0 boot received) 0
Gain deferred ($120,000 gain realized – $0 gain recognized) 120,000
Basis of new property ($550,000 FMV of new property – $120,000 gain deferred) 430,000

Question 29

MCQ-14658
In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other’s mortgage. What is the amount of Tatum’s recognized gain?

Answer 29

$50,000

Exchange of business-use real property qualifies for like-kind exchange
nonrecognition treatment. Any gain realized is recognized to the extent of boot (non-like-kind
property) received. If there is both debt relief and debt assumed, the debt is netted together (“net the
debt”). Net debt relief is boot received and net debt assumed is boot paid.

Fair market value of new office building received $350,000
+ Net debt relief ($120,000 debt relief – $70,000 debt assumed) 50,000
Amount realized 400,000
– Adjusted basis of farmland given up (250,000)
Gain realized $150,000
Gain recognized (lesser of $150,000 gain realized and $50,000 boot received) $50,000

Question 30

MCQ-01654
Leker exchanged real property that was used exclusively for business and had an adjusted tax basis of $20,000 for new real property. The new real property had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker’s tax basis in the acquired real property?

Answer 30

$17,000

$17,000 is the tax basis in the new real property.
Gain/loss realized = Amount realized (FMV of new property + Cash boot received) – Adjusted basis of old property.
Gain/loss realized = Amount realized ($10,000 + $3,000) – $20,000 = ($7,000) loss realized. A realized loss on a like-kind exchange is never recognized. Therefore the loss deferred = $7,000. The deferred loss increases the basis in the new property. Basis in new property = FMV of property received – Deferred gain + Deferred loss. Basis in new property = 10,000 – 0 + $7,000

Question 31

MCQ-01747
In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction:

Property given up by Reed
Fair value 500,000
Adjusted basis 300,000

Property received by Reed
Fair value 450,000

What amount of gain should be recognized in Reed’s Year 9 income tax return?

Answer 31

$50,000

Gain is only recognized on an exchange of “like-kind” property for the lesser of the amount of
“gain realized” or the amount of “boot” received in the exchange.

Fair value of property received 450,000
Amount of cash (boot) received 50,000
Total amount realized 500,000
Basis of property given up (300,000)
Gain realized 200,000
Gain recognized* 50,000

• Gain recognized is the lesser of the amount of gain realized or amount of the boot received.

Question 32

MCQ-15829
Smith owns vacant Lot A, with a basis of $10,000 and a fair market value of $25,000. Jones owns Lot B, with a basis of $11,000 and a fair market value of $22,000. Smith and Jones agree to trade lots, with Jones paying Smith $3,000. After the exchange, what amount is Smith’s basis in Lot B?

Answer 32

$10,000

In a like-kind exchange in which boot is received, the basis is equal to the FMV of the property received less any deferred gain. Smith’s basis in Lot B is $10,000 ($22,000 FMV of
property received less the $12,000 deferred gain). The deferred gain is calculated by taking the $15,000 realized gain ($25,000 proceeds minus $10,000 basis) less the $3,000 gain recognized.

Question 33

MCQ-06402
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss recognized by the taxpayer on this transaction?

Answer 33

$0

Gain/loss realized = Amount realized (FMV of new building received) − Adjusted basis of old building given up
= $20,000 amount realized (FMV of new building) – $17,000 adjusted basis of
old building ($35,000 cost – $18,000 accumulated depreciation)
= $3,000 gain realized

Gain recognized = $0 (the lesser of gain realized of $3,000 or boot received of $0)

Question 34

MCQ-06404
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $12,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss realized by the taxpayer on this transaction?

Answer 34

$3,000 loss

Gain/loss realized
= Amount realized (FMV of new property received) − Adjusted basis of old real property given up
= $20,000 amount realized (FMV of new real property) – $23,000 adjusted basis
of old real property ($35,000 cost – $12,000 accumulated depreciation)
= $3,000 loss realized

Question 35

MCQ-06410
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new real property. What is the gain or loss realized by the taxpayer on this transaction?

Answer 35

$3,000 gain

Gain/loss realized = Amount realized (FMV of new real property received + Boot received) − Adjusted basis of old real property given up
= $20,000 amount realized ($16,500 FMV of new real property + $3,500 FMV of trailer boot received) − $17,000
adjusted basis of old real property ($35,000 cost − $18,000 accumulated depreciation)
= $3,000 gain realized

Question 36

MCQ-06412
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new real property. What is the taxpayer’s basis in the new real property
received?

Answer 36

$16,500

Gain/loss realized = Amount realized (FMV of new real property received + Boot received) − Adjusted basis of old real property given up
= $20,000 amount realized ($16,500 FMV of new real property + $3,500 FMV of trailer boot received) − $17,000 adjusted basis of old real property ($35,000 cost − $18,000 accumulated
depreciation)
= $3,000 gain realized

Gain/loss recognized = $3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Gain deferred = $0 ($3,000 gain realized – $3,000 gain recognized)
Basis of new property = FMV of property received – Deferred gain + Deferred loss
= $16,500 – $0 + $0
= $16,500

Question 37

MCQ-04111
On year 1, Janice had the following transactions in Jacky, Inc. common stock:

                            Shares Price Jan. 01 – Purchase 500 $25 May 12 – Sale         500 $23 May 28 – Purchase 250 $22 Oct. 15 – Sale          100 $18

What is Janice’s deductible capital loss?

Answer 37

$1,100

The wash sale rules apply to 250 shares that were sold on May 12, because they were repurchased within 30 days of the sale. The computation of Janice’s total deductible capital loss is as follows:

May 12 sale of 250 shares that were not repurchased within 30 days:
250 shares × sale price of $23/share = $5,750
250 shares × purchase price of $25/share (6,250)
Loss on May 12 sale $500

October 15 sale of 100 shares:
100 shares × sale price of $18/share $1,800
100 shares × basis of $24/share* (2,400)
Loss on October 15 sale $600
Total deductible capital loss $1,100

• The basis of these shares includes the purchase price of $22/share plus the loss of $2/share (sale price of $23/share less purchase price of $25/share) that was disallowed because of application of the loss disallowance rules.

Question 38

MCQ-14906
During the current year, an individual taxpayer completed the following stock transactions related to Alpha Corp. stock:
Date Shares Traded Price/Share
May 15 1,000 purchased $18
June 1 1,000 purchased $12
June 10 1,000 sold $10

The 1,000 shares sold on June 10 had been purchased on May 15. What is the maximum amount, if any, that the taxpayer can deduct in the current year?

Answer 38

$0

The sale of Alpha Corp. stock on June 10 is a wash sale. The stock was sold at a loss ($10 sales price – $18 purchase price on May 15) and identical stock was purchased within 30
days before or after the June 10 sale date (June 1). Deduction of the $8,000 loss on the wash sale is disallowed [($10 sales price − $18 purchase price) × 1,000 shares]. The disallowed loss is added to the cost basis of the repurchased stock: $12 purchase price × 1,000 shares = $12,000 + $8,000 disallowed loss = $20,000 basis of repurchased stock.

Question 39

MCQ-01719
Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000.
What amount of loss from the sale of Core’s stock is deductible on Smith’s Year 1 and Year 2 income tax returns?

Answer 39

Year 1 $0; Year 2 $0

In Year 1, no sale of stock occurred so there would be no loss. In Year 2, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000

Question 40

MCQ-05902
Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business and the television solely for personal entertainment. During the same year, Talbot experienced serious financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is Talbot entitled to deduct as a loss relating to the sale of the television and laptop?

Answer 40

$500

The loss on the disposal of business-use assets is deductible, but the loss on the disposal of personal-use assets is not deductible. Because the laptop was used for business
purposes, the $500 loss (calculated as the sales price of $1,000 minus the cost of $1,500) on the sale of the laptop is deductible. However, because the television was used for personal purposes, the loss on the sale of the television is not deductible.

Question 41

MCQ-15816
A taxpayer plans to sell the following assets:
-A home rented during the entire year by the taxpayer’s tenant at a market rental rate.
-An automobile used by the taxpayer solely for recreational purposes.
-A show dog held by the taxpayer for hobby purposes.
-Common stock held by the taxpayer for investment purposes.

If the taxpayer projects a $10,000 loss on each asset sale, then the losses will reduce adjusted gross
income by what amount?

Answer 41

$13,000

The losses will reduce the taxpayer’s adjusted gross income (AGI) by $13,000 ($10,000 rental house + $3,000 investment stock).
The rental house is a Section 1231 asset. A net 1231 loss is an ordinary loss, which is not limited. There are no other 1231 gains or losses, so the entire $10,000 loss on the sale of the rental house is deductible.
The common stock held for investment is a capital asset. An individual taxpayer is allowed to deduct up to $3,000 of net capital loss each year. There are no other capital gains or losses, so $3,000 of the $10,000 loss on the sale of the investment stock is deductible.
The automobile used for recreational purposes and the show dog held for hobby purposes are both personal assets. Losses on the sale of personal assets are non-deductible.

Question 42

MCQ-05840
A married couple abandoned their principal residence in May. They had purchased the house five years ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if any, that they are allowed to deduct on the current-year’s tax return for the abandoned property?

Answer 42

$0

No deduction is allowed for the loss on disposal of a personal-use asset.