Nonrecognition Property Transactions Flashcards
In a nontaxable exchange, Tony traded a warehouse having an adjusted basis of $50,000 and a fair market value of $75,000 for another warehouse having a fair market value of $110,000. In addition, Tony paid cash of $30,000. What is Tony’s basis in the warehouse? A. $110,000 B. $105,000 C. $75,000 D. $80,000
$80,000
Answer (D) is correct.
The basis of real property acquired in a tax-free exchange is the same as the adjusted basis of the property given in the exchange (including boot given, such as cash), decreased by the amount of any boot (money or property not in kind) received or loss recognized, and increased by the amount of gain. If cash or boot is received in a like-kind exchange, gain will be recognized to the extent of the cash or fair market value of the boot. Tony will not recognize a gain on the transaction. His basis in the new warehouse is $80,000 ($50,000 adjusted basis + $30,000 cash paid).
Authors’ note: The EA exam occasionally asks a question in which the values in a trade do not equal each other ($75,000 + $30,000 does not equal $110,000). Use the FMV of the assets received as the selling price. Using the $110,000 FMV received, the FMV of the warehouse given up is $80,000 ($110,000 – $30,000 cash paid).
A married couple, filing a joint return, claims the $500,000 exclusion of gain available on the sale of a principal residence. Which of the following statements will disqualify the couple from using the $500,000 exclusion?
A. Only one spouse meets the ownership requirement.
B. None of the answers will cause a disqualification.
C. Only one spouse meets the use test.
D. Both spouses used the exclusion 5 years ago.
Only one spouse meets the use test.
Answer (C) is correct.
Married individuals are eligible for a $500,000 exclusion if (1) either spouse meets the ownership test, (2) both spouses meet the use test, and (3) neither spouse is ineligible due to use of the exclusion in the past 2 years. However, if only one spouse meets the use test, (s)he may be eligible for a prorated exclusion.
Timbertoppers, Inc., is in the forestry business. It wanted to acquire a parcel of property owned by Woody, who held the property for investment. Woody would not sell but agreed to exchange the property if Timbertoppers could find other suitable property. Timbertoppers could not locate suitable property immediately, so the parties entered into an agreement by which Timbertoppers took title to Woody’s property (which had a fair market value of $400,000 and a basis of $50,000) on August 1, Year 1, and an escrow arrangement was set up in which Timbertoppers placed certificates of deposit as security until real property could be found to suit Woody. If one parcel valued at $300,000 is identified on September 1, Year 1, and transferred to Woody on January 10, Year 2, and a second parcel valued at $100,000 is identified on October 1, Year 1 and transferred to Woody on December 20, Year 1, what is Woody’s gain?
A. $0 in Year 1; $100,000 in Year 2.
B. $300,000 in Year 1; $50,000 in Year 2.
C. $100,000 in Year 1; $0 in Year 2.
D. $0
$100,000 in Year 1; $0 in Year 2.
Answer (C) is correct.
Woody will realize a gain of $350,000 ($400,000 realized – $50,000 basis). Provided the escrow is arranged so that the certificates of deposit in escrow are clearly the property of Timbertoppers pending performance and Woody has no right in such escrow except upon the failure of Timbertoppers to perform, a nonsimultaneous exchange will also qualify for nonrecognition of gain under the case of Starker (602 F.2d 1341, 9th Cir., 1979).
However, Sec. 1031(a)(3), enacted following the Starker decision, requires, for transfers after July 18, 1984, that the property to be received be identified as such within 45 days after transferring the old property being exchanged, and that the new property actually be received within 180 days or by the due date of the taxpayer’s tax return if sooner. If these requirements are not met, the property received will be treated as boot. These requirements were met for the parcel received on January 10, Year 2, but not for the parcel received on December 20, Year 1, so Woody must recognize $100,000 (the amount of the boot) in Year 1.
In 2011, Ms. Nugget, a farmer, inherited a large parcel of land that had a fair market value of $150,000 at that time. She used the large parcel in her farming operations. In 2019, Ms. Nugget decided she no longer wanted the large parcel in her farm operations, so she offered it for sale for $250,000. Mr. Oak approached Ms. Nugget with an offer to exchange a small parcel (which Ms. Nugget wanted for her farming operations) and some farm equipment for the large parcel. The small parcel had a fair market value of $200,000, and the equipment had a fair market value of $50,000. Ms. Nugget accepted Mr. Oak’s offer and entered into a partially nontaxable exchange in which she exchanged her land for Mr. Oak’s land and equipment. What is Ms. Nugget’s basis in the small parcel? A. $200,000 B. None of the answers are correct. C. $250,000 D. $150,000
$150,000
Answer (D) is correct.
The basis of real property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received or loss recognized, and increased by any gain recognized or boot given [Sec. 1031(d)]. Thus, the small parcel is equal to the adjusted basis of the large parcel ($150,000), less the boot received of the equipment ($50,000), plus the gain recognized on the boot received ($50,000), or $150,000 ($150,000 AB large parcel – $50,000 boot received + $50,000 gain recognized on boot received).
Jerry and Elaine were married on August 15 of the current year. Prior to their marriage, they had each maintained a separate principal residence. Jerry had a home that he purchased for $80,000 15 years ago and sold in December of last year for $100,000. Elaine had a home that she purchased 10 years ago for $164,000, which she sold in December of the current year for $242,000. What amount of the gain is excluded in the current year? A. $250,000 B. $78,000 C. $0 D. $125,000
$78,000
Answer (B) is correct.
Married individuals are eligible for a $500,000 exclusion if (1) either spouse meets the ownership test, (2) both spouses meet the use test, and (3) neither spouse is ineligible due to use of the exclusion in the past 2 years. Since Jerry used the exclusion last year, he is ineligible to use the exclusion in the current year. However, if a single individual eligible for the exclusion marries a person who used the exclusion within 2 years before marriage, the individual is entitled to a $250,000 exclusion. Elaine meets the ownership and use tests and thus is entitled to exclude the entire realized gain of $78,000.
Rochelle transferred an apartment building she held for investment to Mona in exchange for land moving equipment. The apartment building was subject to a liability of $20,000, which Mona assumed for legitimate business purposes. The land moving equipment had an adjusted basis of $40,000 and a fair market value of $70,000. The apartment building had a fair market value of $100,000 and an adjusted basis of $60,000. Rochelle received $8,000 cash in addition to receiving the land moving equipment. What is Rochelle’s recognized gain on this exchange? A. $28,000 B. $0 C. $38,000 D. $8,000
$38,000
Answer (C) is correct.
Since the transaction does not qualify as a like-kind exchange, the entire realized gain must be recognized. The realized gain equals $38,000 ($70,000 FMV of property received + $8,000 cash + $20,000 liabilities assumed – $60,000 adjusted basis of property sold).
Senior gave his son, Junior, his personal residence with an adjusted basis of $60,000 and a fair market value of $40,000, 2 years ago. Junior sold the house in the current year, after living in it for the past 2 years, for $35,000. As a result of the sale, Junior will
A. Report a $25,000 loss.
B. Report a $5,000 loss.
C. Report no gain or loss.
D. Have his father report a $25,000 loss.
Report no gain or loss.
Answer (C) is correct.
Under Sec. 1001(a), gain or loss is the excess of the amount realized over the adjusted basis. The amount realized is $35,000. The adjusted basis is determined under Sec. 1015. The basis for gain is the donor’s basis, and the basis for loss is the lower of the donor’s basis or the fair market value (FMV) on the date of the gift. Junior’s basis is the FMV of $40,000. Thus, he has a realized loss of $5,000 on the sale. However, he cannot deduct a loss on the sale of a personal residence.
George and Marie sold their primary residence this year for $300,000. They purchased the home 20 years ago for $100,000 and lived in the home until the sale. George was a general contractor in business for himself and used 1/6th of the home as a business office. He deducted 1/6th of all costs, including depreciation, since the purchase. The original cost of $100,000 was assessed at $40,000 land and $60,000 building. In taking depreciation for the office, George used the straight-line method with a 30-year life. What is George and Marie’s depreciation on the business portion? A. $6,667 B. $16,667 C. None D. $200,000
$6,667
Answer (A) is correct.
Under Reg.1.121-1(e)(i), no allocation of gain is required if both the residential and nonresidential portions of the property are within the same dwelling unit. However, Sec. 121 will not apply to the gain to the extent of any post-May 6, 1997 depreciation adjustments. The portion of the selling price allocated to the business office is $50,000 ($300,000 × 1/6). The original basis of the business office was $16,667 ($100,000 × 1/6), of which $10,000 was depreciable ($60,000 × 1/6). The depreciation taken on the business office was $6,667 ($10,000 × 1/30 × 20 years).
Emmett transferred an apartment building he held for investment to Ray, an unrelated party, in exchange for an office building. At the time of the exchange, the apartment building had a fair market value of $90,000 and an adjusted basis to Emmett of $70,000. The apartment building was subject to a liability of $30,000, which Ray assumed for legitimate business purposes. The office building had an adjusted basis to Ray of $30,000 and a fair market value of $80,000. In addition, Emmett received $10,000 cash in exchange. What is Emmett’s recognized gain on this exchange? A. $10,000 B. $40,000 C. $30,000 D. $50,000
$40,000
Answer (B) is correct.
Since the transaction qualifies as a like-kind exchange of real property, Sec. 1031(b) requires the realized gain to be recognized only to the extent of boot received. Regulation 1.1031(d)-2 provides that liabilities assumed by the other party are to be treated as money received by the taxpayer. The amount realized equals $120,000 ($80,000 FMV of property received + $30,000 relief of mortgage + $10,000 cash received). The adjusted basis of the property is $70,000. The realized gain is $50,000 ($120,000 amount realized – $70,000 adjusted basis). However, boot received is less than the gain realized. Since boot received equals $40,000, only $40,000 is recognized.
Assuming all items are held for use in a business or for investment, which of the following does NOT qualify as a nontaxable like-kind exchange?
A. The exchange of stock of one corporation held for investment for stock of another corporation to be held for investment.
B. The trade of an apartment house for a store building that is subsequently rented out.
C. The exchange of a vacant city lot for unimproved farm land.
D. The exchange of real estate you own for a real estate lease that runs 30 years or more.
The exchange of stock of one corporation held for investment for stock of another corporation to be held for investment. Answer (A) is correct. Section 1031(a) specifically excludes stocks (and other securities and debt instruments) from qualifying for like-kind exchange treatment. Therefore, even though the exchange of stock is for property within the same class, such an exchange does not qualify for like-kind treatment.
On December 1, Year 1, William and Monica purchased a home for $250,000. William and Monica are married and file jointly. On December 1, Year 2, William changed jobs and the couple had to sell the home to Al, a not-so-shrewd investor, for $600,000. What amount of the realized gain will they be able to exclude? A. $125,000 B. $0 C. $350,000 D. $250,000
$250,000
Answer (D) is correct.
In order to use the $250,000 exclusion provided by Sec. 121, use and ownership requirements must be met. The taxpayer must have used and owned the home as a principal residence for 2 of the 5 previous years. In situations in which the taxpayer sells his or her house due to unforeseen changes in employment or health, a pro rata portion of the $250,000 exclusion may be used. Since William and Monica owned and used the home for 12 months, they can exclude a maximum of $250,000 ($500,000 × 12/24 exclusion for married taxpayers).
Joe had a taxable gain on the sale of his main home, which could not be excluded on his 2019 tax return. He had no business use of the home. Which schedule does he need to submit to report the gain?
A. Schedule A, for itemized deductions.
B. Schedule D, for capital gains.
C. Schedule C, for sole proprietors.
D. Schedule SE, for self-employment income.
Schedule D, for capital gains.
Answer (B) is correct.
A personal residence is a capital asset. When the taxpayer cannot exclude a portion or all of the gain from the sale of principal residence, the gain is reported on Schedule D.
Mr. McCarthy exchanged real estate that he held for investment purposes for other real estate that he will hold for investment purposes. The real estate that he gave up had an adjusted basis of $8,000. The real estate that he received in the exchange had a fair market value of $10,000, and he also received cash of $1,000. Mr. McCarthy paid $500 in exchange expenses. What is the amount of gain recognized by Mr. McCarthy? A. $500 B. $1,000 C. $2,500 D. None of the answers are correct.
$500
Answer (A) is correct.
The basis of real property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received or loss recognized, and increased by any gain recognized or boot given [Sec. 1031(d)]. The gain recognized equals the lesser of the realized gain ($10,000 FMV of land + $1,000 boot received – $8,000 basis – $500 boot given) or the boot received ($1,000). The IRS has ruled that exchange expenses may be deducted in computing the amount of gain or loss realized, offset against cash payments received in determining gain to be recognized, or included in the basis of the property received (Rev. Ruling 72-456). The best action would be to offset the cash received. Therefore, Mr. McCarthy will recognize a $500 gain ($1,000 – $500).
Arnold (age 60) and Beatrice (age 45) are married. They sold their home, owned by Arnold, at a profit of $300,000 on March 1, 2019. Beatrice unexpectedly died in September 2019 of a disease. Arnold remarried in February 2020 and purchased a new, more expensive home in March. Beatrice’s mother was appointed as executor of her estate. She elected to file a separate return for Beatrice for 2019. If Beatrice’s mother does not join Arnold in electing to exclude gain, how much of the gain can Arnold exclude on his 2019 return? A. $250,000. B. $300,000. C. $150,000. D. None.
$250,000.
Answer (A) is correct.
Arnold is allowed to exclude $250,000. He does not need the executor’s permission to take his own exclusion. He could have qualified for the $300,000 if the executor had filed a joint return for the deceased spouse.
Katrina transferred an apartment building held for investment to Mona in exchange for an office building. The apartment building was subject to a liability of $10,000, which Mona assumed for legitimate business purposes. The office building had an adjusted basis of $20,000 and a fair market value of $35,000. The apartment building had a fair market value of $50,000 and an adjusted basis of $30,000. Katrina received $5,000 cash in addition to receiving the office building. What is Katrina’s recognized gain on this exchange? A. $20,000 B. $15,000 C. $5,000 D. $0
$15,000
Answer (B) is correct.
Since the transaction qualifies as a like-kind exchange of real property, Sec. 1031(b) requires the realized gain to be recognized only to the extent of boot received. Regulation 1.1031(d)-2 provides that liabilities assumed by the other party are to be treated as money received by the taxpayer. Thus, the total boot received by Katrina is $15,000 ($5,000 cash received + $10,000 of liabilities transferred).
Katrina realizes a gain of $20,000 ($35,000 FMV of property received + $10,000 of liabilities transferred + $5,000 cash – $30,000 adjusted basis of property transferred). The gain recognized is the lesser of total boot received ($15,000) or the realized gain ($20,000).
Joe exchanged a building for another like-kind building. Joe had a basis of $16,000 before he had made $10,000 in improvements prior to the exchange. He exchanged it for a building worth $36,000. Joe did not recognize any gain from the exchange on his 2019 individual tax return. What is Joe’s basis in the new property? A. $10,000 B. $26,000 C. $16,000 D. $36,000
$26,000
Answer (B) is correct.
Joe’s basis in his building is $16,000 plus $10,000 in improvements. His total basis is $26,000. Because no money exchanged hands and no gain was recognized, Joe’s basis in the new property is the same as his basis in the old property.
Karen, who is single, paid $150,000 for her residence in January 2015 and lived in it until January 2017. She then moved away and rented her home from February 2017 until she moved back in February 2018. She sold it in August 2019 for $240,000. What amount of gain on the sale of her residence is excludable from income? A. $90,000 B. $70,380 C. $240,000 D. $250,000
$70,380
Answer (B) is correct.
The taxpayer may exclude $250,000 ($500,000 for married taxpayers filing jointly) of a realized gain on the sale of a principal residence. The exclusion is available if the individual owned and occupied the residence for an aggregate of at least 2 of the 5 years before the sale. The exclusion may be used only once every 2 years. The gain on the sale of the residence must be prorated between qualified and nonqualified use. Nonqualified use includes periods that the residence was not used as the principal residence of the taxpayer prior to the last day the homeowner lived in the house. The period when Karen is renting her home is nonqualified use because she moved back in. Karen owned the property for 55 months (January 2015-July 2019), but 12 months is nonqualified use. Thus, the percentage of gain that can be excluded is 78.2% (43 qualified use months ÷ 55 total months). Karen’s gain is $90,000 and she can exclude $70,380.
A nontaxable exchange is an exchange in which any gain is not taxed and any loss cannot be deducted. To be nontaxable, the exchange must meet all of the following conditions EXCEPT
A. The property must be intangible property.
B. The property must be business or investment property.
C. The property must not be property held for sale.
D. The property must be “like-kind” or “like-class” property.
The property must be intangible property. Answer (A) is correct. Section 1031(a)(1) requires that real property qualifying for tax-free treatment must be held for productive use in a trade or business or investment. Section 1031(a)(2) exempts intangible property, such as stocks, bonds, and partnership interests from tax-free exchange treatment. Section 1031(a) requires that real property exchanged tax-free must be of like-kind. Hence, real property exchanged for similar real property would qualify for tax-free treatment.
Ted and William agreed to trade apartment buildings, with Ted agreeing to pay William $10,000 cash. Ted’s basis in his apartment building is $40,000. William’s basis in his apartment building is $50,000. What is Ted’s basis in his new apartment building? A. $10,000. B. $40,000. C. $50,000. D. None of the answers are correct.
$50,000. Answer (C) is correct. Section 1031 defers recognizing gain or loss to the extent that real property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like-kind. Qualified property received in a like-kind exchange has an exchanged basis adjusted for boot and gain recognized. Adjusted basis of property given $40,000 \+ Gain recognized 0 \+ Boot given (cash, liability incurred, other property) 10,000 – Boot received (cash, liability relief, other property) 0 – Loss recognized (boot given) 0 = Basis in acquired property $50,000
Which of the following statements is true regarding exclusion of the gain on the sale of a principal residence?
A. All of the answers are correct.
B. An individual may exclude $250,000 of gain on the sale of a residence (s)he purchased 10 years ago and lived in for the past 3 years.
C. A married couple may exclude $500,000 of gain on the sale of a residence they purchased jointly 5 years ago and lived in for 4 years.
D. An individual may exclude a pro rata amount of gain on the sale of a principal residence due to a change in job location.
All of the answers are correct.
Answer (A) is correct.
An individual may exclude $250,000 ($500,000 for married individuals filing jointly) on the sale of a principal residence provided (s)he lived there for at least 2 years. Additionally, a pro rata exclusion is available if the sale occurred prior to 2 years if the sale was as a result of a change in job locations or other unforeseen circumstances.
Juan sold his home in Year 1. Juan had owned and occupied the home for 8 years. Based on the following facts, what is the amount of his recognized gain?
Signed a contract on 3/4/Yr 1 to sell his home.
Sold 8/3/Yr 1 for
$1,000,000
Selling expenses
50,000
Replaced and paid for a broken window 3/2/Yr 1
300
Basis of old home before repairs and improvements
600,000
A. $150,000
B. $350,000
C. $100,000
D. $0
$100,000
Answer (C) is correct.
Selling expenses reduce the proceeds received when calculating realized gain. Capital improvements to the property, on the other hand, increase the basis in the assets sold. But normal repairs, such as replacing a broken window, do not constitute a capital improvement. An individual may exclude $250,000 ($500,000 for married individuals filing jointly) on the sale of a principal residence provided (s)he lived there for at least 2 years. Thus, Juan will only recognize $100,000 of the realized gain ($350,000 realized gain – $250,000 exclusion). The realized gain at $350,000 is ($1,000,000 sales price – $50,000 selling expenses) – ($600,000 basis).
Clyde, a single person, sold his principal residence for $700,000. He purchased his home 10 years ago for $150,000 and lived there until he sold it. He paid for capital improvements of $75,000, real estate commissions of $36,000, and other settlement costs of $4,000. How much taxable gain must Clyde report? A. $185,000 B. $0 C. $225,000 D. $435,000
$185,000
Answer (A) is correct.
A taxpayer may exclude up to $250,000 ($500,000 for a joint return) of a gain on the sale of a principal residence if (s)he primarily resided in this home for 2 years of a 5-year period before the sale of the home. The gain is determined by subtracting the adjusted basis of $225,000 ($150,000 + $75,000) from the amount realized of $660,000 ($700,000 – $36,000 – $4,000). This yields a gain of $435,000. Clyde only has to claim $185,000 ($435,000 – $250,000) as a gain (Sec. 121).
Pete purchased his home on June 1, 2010. On June 1, 2015, Pete became physically incapable of self-care and entered a licensed care facility. Pete sold the residence on April 15, 2019. Pete was residing in the facility at the time of sale. Pete had purchased the home for $150,000, and he sold the home for $300,000. What is Pete’s recognized gain for 2019? A. $0 B. $300,000 C. $150,000 D. $250,000
$0
Answer (A) is correct.
If an individual becomes physically or mentally incapable of self-care, the individual is deemed to use a residence as a principal residence during the time when the individual owns the residence and resides in a licensed care facility. To apply, the individual must have owned and used the residence as a principal residence for an aggregate period of at least 1 year during the 5 years preceding the sale or exchange. Pete met these requirements, so the gain is excluded.
Mario sold his home in 2019. On the sale, he realized a $300,000 gain. Mario has lived in the home as his principal residence for the past 5 years. What is the amount of gain he must recognize in 2019? A. $50,000 B. $0 C. $300,000 D. $250,000
$50,000
Answer (A) is correct.
A taxpayer may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of gain on the sale of a principal residence. The exclusion is available if the individual owned and occupied the residence as a principal residence for an aggregate of at least 2 of the 5 years before the sale. Therefore, Mario may exclude only $250,000 and is required to recognize $50,000.
Myrtle moved in with Eddie in 2016. They then were married in 2018. Eddie had lived in this home for the past 13 years. In early 2019, Eddie and Myrtle decided that marriage was not for them; consequently, they were divorced. Eddie’s home was transferred to Myrtle incident to the divorce. Myrtle then sold the house for $250,000. The basis in the home was $80,000. What is Myrtle’s recognized gain on the sale of the home in 2019? A. $0 B. $45,000 C. $170,000 D. $250,000
$0
Answer (A) is correct.
Although Myrtle does not meet the ownership test because she owned the property for less than an aggregate of 2 years in the last 5 years before the sale, a special rule applies to divorced taxpayers. If a residence is transferred to a taxpayer incident to a divorce, the time during which the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership. Also, a taxpayer who owns a residence is deemed to use it as a principal residence while the taxpayer’s spouse or former spouse is given use of the residence under the terms of a divorce or separation; however, Myrtle meets the use test since she lived with Eddie starting in 2016. Myrtle’s ownership period includes Eddie’s. Myrtle is entitled to exclude a maximum realized gain of $250,000.
Mr. A exchanged stock and real estate that he held for investment for other real estate he intends to hold for investment. The stock at the time of the exchange had a fair market value of $30,000 and an adjusted basis to A of $27,000. A’s old real estate had a fair market value of $150,000 and an adjusted basis to him of $90,000. The real estate acquired by Mr. A had a fair market value of $180,000 at the time of the exchange. What is the amount of A’s recognized gain (or loss) on the exchange? A. $3,000 B. $30,000 C. $(30,000) D. $0
$3,000
Answer (A) is correct.
Neither gain nor loss is recognized on an exchange of like-kind real property held for productive use in a trade or business or for investment [Sec. 1031(a)]. In addition, recognition of gain or loss is not triggered when boot is given. However, when boot is given, there is no provision preventing recognition of gain or loss on the boot itself.
The stock Mr. A exchanged with the real estate is boot. Hence, Mr. A realizes and recognizes a $3,000 gain on the stock ($30,000 fair market value – $27,000 adjusted basis). There is no other gain or loss on the exchange because the old and new real estate exchange qualifies under Sec. 1031.
In a nontaxable exchange, Tony traded a warehouse having an adjusted basis of $120,000 for a new warehouse that had a fair market value of $104,000 and a machine with a basis of $15,000 and a FMV of $20,000. What is Tony’s basis in the new warehouse? A. $114,000 B. $120,000 C. $110,000 D. $104,000
$104,000
Answer (D) is correct.
The basis of real property acquired in a tax-free exchange is the same as the adjusted basis of the property given in the exchange (including money), decreased by the amount of any boot (money or property not in kind) received or loss recognized, and increased by the amount of gain. If cash or boot is received in a like-kind exchange, gain will be recognized to the extent of the cash or fair market value of the boot. Tony will recognize a $4000 gain ($124,000 amount realized – $120,000 basis). Tony’s basis in the new warehouse will be $104,000 ($120,000 basis – $20,000 boot received + $4000 gain recognized).
Mr. Almond farmed a total of 200 acres of land, comprised of two parcels of land located about one-half mile apart. One parcel was 120 acres, and the second parcel was 80 acres. Mr. Almond found moving his workers and equipment between the two parcels to be very expensive. He approached the ABC farming partnership, which owned 80 acres next to Mr. Almond’s 120-acre parcel, about entering into a nontaxable exchange of his 80 acres for the 80 acres owned by the partnership. Mr. Almond has a cost basis of $100,000 in his 80 acres. The fair market value of his 80 acres at the time of the proposed exchange was $400,000, and the fair market value of the ABC partnership’s 80 acres was $350,000. The ABC partnership agreed to an exchange. In 2019, Mr. Almond transferred his 80 acres to the ABC partnership in exchange for ABC’s 80 acres and $50,000 cash. What was the amount of Mr. Almond’s recognized gain in 2019? A. $50,000 B. $400,000 C. No gain. D. $300,000
$50,000
Answer (A) is correct.
The transfer qualifies for nonrecognition under Sec. 1031. Mr. Almond must recognize a gain equal to the lesser of gain realized or boot received. Therefore, he must recognize a $50,000 gain, which is less than his realized gain.
Alex is a general partner in the XYZ Partnership. The basis of his partnership interest is $50,000 and the fair market value is $100,000. Bill is a limited partner in the ABC Partnership. The basis of his partnership interest is $30,000, and the fair market value is $100,000. Alex and Bill exchange their partnership interests. No other consideration is involved in the exchange. Which of the following is the best answer?
A. Alex must recognize a gain of $50,000, and Bill must recognize a gain of $70,000. The like-kind exchange provisions exclude the transfer of partnership interests in different partnerships.
B. Alex must recognize a gain of $50,000. The receipt of a limited partnership interest for a general partnership interest is not a like-kind exchange.
C. Neither party must recognize gain.
D. Bill must recognize a gain of $70,000. The receipt of a general partnership interest for a limited partnership interest is not a like-kind exchange.
Alex must recognize a gain of $50,000, and Bill must recognize a gain of $70,000. The like-kind exchange provisions exclude the transfer of partnership interests in different partnerships. Answer (A) is correct. Section 1031(a)(2)(D) excludes the transfer of partnership interests from the like-kind exchange provisions. Therefore, each participant in the exchange should recognize gain equal to the excess of the amount realized over his basis. Alex must recognize a gain of $50,000 ($100,000 FMV – $50,000 basis), and Bill must recognize a gain of $70,000 ($100,000 FMV – $30,000 basis). Note that it is not possible to exchange a general partnership interest for a general partnership interest under Sec. 1031.
Anne, who is single, owned and used her house as her main home from January 2013 until January 2018. She then moved away and rented her home from February 2018 until she sold it in August 2019. Her home sold for $240,000, which included $20,000 of depreciation and $12,000 of selling expenses. Using a zero basis, compute the amount that is excludable from income. A. $220,000 B. $208,000 C. $228,000 D. $240,000
$208,000
Answer (B) is correct.
The taxpayer may exclude $250,000 ($500,000 for married taxpayers filing jointly) of a realized gain on the sale of a principal residence. The exclusion is available if the individual owned and occupied the residence for an aggregate of at least 2 of the 5 years before the sale. The gain on sale must be prorated between qualified and nonqualified use. Nonqualified use includes periods that the residence was not used as the principal residence of the taxpayer, prior to the last day the homeowner lived in the house. Since all of Anne’s nonqualified use occurred after the last day she lived in the house, there are zero periods of nonqualified use. Any selling expenses incurred reduce the amount realized, therefore Anne’s amount realized is $228,000 ($240,000 – $12,000). Also, any gain equal to depreciation allowed or allowable may not be excluded. The amount that is excludable is therefore $208,000 ($228,000 amount realized – $20,000 depreciation).
