Chapter 12
c.
$3,828 Section 1245 ordinary income.
d.
$6,000 Section 1245 ordinary income
e.
$9,828 section 1245 ordinary income and $6,000 Section 1231 loss.
c
66. Which of the following statements is/are correct?
I.
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
67. Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value
of $185,000. The city of Springfield condemns the property for a new airport. The condemnation award is $185,000.
Natural Power invests the $185,000 in a new warehouse on the other side of the city. What is the gain or loss that Natural
Power Corporation must recognize due to the transactions?
a.
No gain or loss
b.
$10,000 gain
c.
$10,000 loss
d.
$185,000 gain
c
68. Carrie owns a business building with an adjusted basis of $95,000 and an appraised fair market value of $98,000. The
city of Millerville condemns the property for a new highway. The condemnation award is $98,000. Carrie invests $90,000
of the proceeds into a new building on the other side of the city. What is the gain or loss that Carrie must recognize due to
the transactions?
a.
No gain or loss
b.
$3,000 gain
c.
$3,000 loss
d.
$8,000 gain
e.
$5,000 loss
69. A flood destroys Owen’s building that cost $100,000 in 2009, which has an adjusted basis of $80,000. Owen’s
insurance company reimburses him $125,000 for his loss. Owen promptly reconstructs the building for $115,000. What is
the minimum amount of gain that Owen must recognize and his basis in the new building?
Recognized New
Gain Basis
a.
$-0- $80,000
b.
$-0- $115,000
c.
$10,000 $80,000
d.
$10,000 $115,000
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e.
$10,000 $150,000
c
70. Charlotte’s apartment building that has an adjusted basis of $200,000 is destroyed by fire. Early the following year,
Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building. What is
the basis in the new building?
a.
$- 0 –
b.
$425,000
c.
$400,000
d.
$200,000
e.
$175,000
71. Daisy’s warehouse is destroyed by a tornado. The warehouse has an adjusted basis of $130,000 when destroyed. Daisy
receives an insurance reimbursement check for $150,000 and immediately reinvests $120,000 of the proceeds in a new
warehouse. What are Daisy’s recognized gain or (loss) and her basis in the replacement warehouse?
Recognized New
Gain (Loss) Basis
a.
$ – 0 – $120,000
b.
$20,000 $120,000
c.
$30,000 $110,000
d.
$10,000 $130,000
e.
$20,000 $100,000
72. Which of the following qualify as replacement property under the involuntary conversion rules?
I.
Mayfield Ice Cream Company’s production plant is destroyed by a hurricane. The
insurance proceeds are used to replace the plant with a refrigerated storage container.
II.
Mayfield Ice Cream Company’s production plant is destroyed by a fire. They sign a five
year lease for a replacement production facility, and the insurance proceeds are then
used to buy an office building
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
73. Which of the following qualify as replacement property under the involuntary conversion rules?
I.
Smooth Yogurt Company’s warehouse for storing its yogurt curds is condemned by the
port authority. The warehouse will be replaced with a new office building in a
neighboring community.
II.
Smooth Yogurt Company’s other warehouse, which was fully leased to another
company, is destroyed by a tornado. The warehouse will be replaced with a rental office
building adjacent to the company’s new office building and will be leased to various
tenants.
a.
Only statement I is correct.
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b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
74. The earliest date that condemned property can be replaced and still qualify for involuntary conversion
(nonrecognition) treatment is
a.
The date of the actual condemnation.
b.
The date of the threat of condemnation.
c.
Two years before the actual condemnation.
d.
Two years before the threat of condemnation.
e.
Three years after the date of the condemnation.
75. Which of the following is/are correct regarding involuntary conversions?
I.
Gains may be deferred if the property involuntarily converted is replaced with property
that is similar to or related in service or use to the converted property.
II.
Deferral of gains is elective only if direct conversion is made into similar property.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
76. Which of the following is/are correct regarding the deferral of gain attributable to the involuntary conversion of
personal property (personalty)?
I.
Gain deferral is mandatory.
II.
Replacement property must be acquired within one year of the close of the tax year in
which gain is realized from an involuntary property damage conversion.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
77. Which of the following is/are correct concerning a principal residence?
I.
A principal residence can be a house, condominium, mobile home, or houseboat.
II.
A taxpayer can have more than one principal residence at a time.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
78. Which of the following is/are correct concerning a principal residence?
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I.
The maximum amount of gain a single taxpayer can exclude on the sale of a principal
residence is $500,000.
II.
To qualify for a $250,000 exclusion, a single taxpayer must have owned and used the
property as a principal residence for at least 2 of the previous 5 years.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
79. Which of the following is/are correct regarding the sale of a principal residence?
I.
A single taxpayer can only use the $250,000 exclusion once every 3 years.
II.
Married taxpayers who both meet the ownership and use tests and file jointly can each
exclude $250,000 of gain ($500,000 total) on the sale of their principal residence.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
80. Which of the following is/are correct regarding the sale of a principal residence?
I.
A taxpayer who is single and fails to meet the ownership or use test due to change in
employment is entitled to a pro rata share of the $250,000 exclusion.
II.
A single taxpayer can exclude up to $250,000 of the gain on the sale of a vacation home.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
81. Tony and Faith sell their home for $495,000, incurring selling expenses of $25,000. They purchased the residence for
$85,000 and made capital improvements totaling $20,000 during the 20 years they lived there. What is their realized gain
and recognized gain on the sale?
Realized Recognized
a.
$365,000 $-0-
b.
$365,000 $115,000
c.
$385,000 $135,000
d.
$385,000 $-0-
e.
$390,000 $-0-
82. Donald and Candice sell their home for $695,000, incurring selling expenses of $30,000. They purchased the
residence for $125,000 and made capital improvements totaling $20,000 during the 20 years they lived there. What is their
realized gain and recognized gain on the sale?
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Realized Recognized
a.
$665,000 $20,000
b.
$520,000 $-0-
c.
$520,000 $20,000
d.
$540,000 $40,000
e.
$520,000 $270,000
c
83. Charlotte purchases a residence for $105,000 on April 13, 2007. On July 1, 2013, she marries Howard and they use
Charlotte’s house as their principal residence. On May 12, 2015, they sell their home for $390,000, incurring $20,000 of
selling expenses and purchase another residence costing $350,000. What is their realized and recognized gain?
Realized Recognized
a.
$ 265,000 $-0-
b.
$ 265,000 $15,000
c.
$ 285,000 $65,000
d.
$ 265,000 $45,000
e.
$ 285,000 $-0-
84. Charlotte purchases a residence for $105,000 on April 13, 2004. On July 1, 2013, she marries Howard and they use
Charlotte’s house as their principal residence. If they sell their home for $390,000, incurring $20,000 of selling expenses
and purchase another residence costing $350,000. Which of the following statements is/are correct concerning the sale of
their personal residence?
I
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
85. Discuss the concepts underlying the determination of the basis of property received in a nontaxable exchange.
because the new property is viewed as a continuation of the original investment.
86. Compare the deferral of recognition of losses resulting from an involuntary conversion with the deferrals for like-kind
exchanges.
involuntary conversions must be recognized. Like-kind exchanges cause mandatory gain and loss deferral.
87. Robbie and Mike exchange machinery in a qualified like-kind exchange. Robbie’s old machine, which originally cost
$42,000, has an adjusted basis of $26,000. His old machine is worth $32,000. Since the machine Mike is trading is worth
only $27,000 (Mike’s basis is $18,000), Mike will even up the exchange by giving Robbie $5,000 in cash.
a.
What is Robbie’s realized gain (loss) on the machine?
b.
What is Robbie’s recognized gain (loss) on the machine?
c.
What is the character of Robbie’s gain or loss on the machine?
d.
What is Robbie’s basis in his new machine?
88. Benito owns an office building he purchased five years ago at a cost of $600,000. The property is currently worth
$800,000, has an adjusted basis of $300,000 and is encumbered by a $400,000 mortgage.
Mitch owns an apartment complex he purchased three years ago at a cost of $600,000. The property is currently worth
$750,000, has an adjusted basis of $500,000 and is encumbered by a $325,000 mortgage.
Benito and Mitch would like to exchange the properties and their respective mortgages. Answer the following questions
regarding the exchange.
a.
Any boot is to be paid in cash. Who must pay the boot and how much must be paid?
b.
Does Benito have to recognize any gain on the exchange? If so, indicate the amount of
gain to be recognized and why it must be recognized.
Mitch’s building:
Benito’s building:
Benito must pay boot of
of $500,000 ($800,000 – $300,000) on the exchange. Gains on like-kind exchanges
89. Jason and Mark exchange equipment each use in their business. In the trade, Jason receives Mark’s equipment that is
worth $20,000. Mark also assumes the $10,000 loan Jason had on the equipment. Jason purchased his equipment for
$25,000 and had taken $12,000 of depreciation on the equipment up to the date of the exchange. Mark’s adjusted basis in
his equipment is $16,000 on the date of the exchange.
a.
What is Jason’s realized gain on the exchange?
b.
What are the amount and the character of the gain Jason must recognize on the exchange?
c.
What is Jason’s basis in the equipment acquired in the exchange?
adjusted basis is reduced by the depreciation taken on the equipment.
90. A flood destroys Franklin’s manufacturing facility. The building had a basis of $600,000 when destroyed. Franklin’s
insurance company reimburses him $850,000, the appraised replacement cost of the building. Franklin purchases a
qualified replacement facility for $1,100,000. Discuss the tax effects of these transactions applying the concepts of
taxation that drive your answers.
Benito’s recognized gain:
Amount realized ($750,000 + $400,000 -$325,000 – $25,000)
Adjusted basis
Realized gain
Mortgage relief
Mortgage assumed
Less: cash paid
Recognized gain
91. Mavis is a schoolteacher with an annual salary of $28,000. Last year she sold a substantial block of securities that she
had inherited from her grandmother several years before. She used the proceeds to buy an apartment building in a
neighboring community. She realized a $15,000 capital loss on the sale. She carries over $12,000 of the capital loss to the
current year. During the current year, a fire destroys the apartment building when its adjusted basis is $100,000. Mavis
receives an insurance check for $110,000 and immediately invests it in another apartment building. Advise Mavis how she
should deal with these situations for the current tax year.
92. A fire destroys David’s business building that cost $200,000 in 2005 and had an adjusted basis of $160,000. David’s
insurance company reimburses him $250,000 for his loss. David promptly reconstructs the building for $230,000.
a.
What is the amount and the character of David’s minimum recognized gain (loss)?
b.
What is the basis of David’s new building?
93. Discuss the type of property that is qualified replacement property for involuntary conversion provisions for gain
deferrals.
94. In each of the following cases, determine the amount of realized gain or loss and the recognized gain or loss:
a.
Silvia sells her house for $100,000 and she pays $8,000 in commissions on the sale. She paid
$110,000 for the house 2 years earlier.
Chapter 12
b.
In July 2014, Carmen, who is single, is transferred to Dallas. She had purchased a new home in
June 2015 for $130,000. Carmen sells the house for $165,000 and pays a commission of
$10,000 on the sale.
c.
Conrad is single and sells his principal residence for $350,000. He pays selling expenses of
$20,000. Conrad purchased the house for $65,000 in 1986.
of the exclusion if she fails to meet these tests due to a change in employment, health, or
Amount realized ($165,000 – $10,000)
Adjusted basis
Realized gain
Exclusion amount
Recognized gain
$250,000 of the gain he realizes on the sale and must recognize $15,000 of the gain.
Amount realized ($350,000 – $20,000)
Adjusted basis
Realized gain
Exclusion amount
Recognized gain
95. Drake and Cynthia sell their home for $475,000, incurring selling expenses of $20,000. They had purchased the
residence in 1998 for $105,000 and made capital improvements totaling $25,000. They buy a new residence for $210,000.
What is their realized gain and recognized gain on the sale? What is their basis in the new house?
Amount realized ($475,000 – $20,000)
96. Dominic and Lois sell their home for $775,000, incurring selling expenses of $40,000. They had purchased the
residence in 1990 for $185,000 and made capital improvements totaling $45,000. They buy a new residence for $310,000.
What is their realized gain and recognized gain on the sale? What is their basis in the new house?
97. Iris’ personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway
artery. Iris receives a condemnation award of $1,000,000. She uses the award to purchase a new residence for $1,150,000.
The adjusted basis of the former residence was $1,100,000 at the date of the condemnation. Determine Iris’s recognized
gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your
answers.
98. Boot
99. Involuntary conversion
100. Like-kind property
101. Principal residence
102. Realized gain
103. Third-party exchange
104. Wherewithal-to-pay
Which of the following qualify as a like-kind exchange?
a.
qualifies as a like-kind exchange
b.
does not qualify as a like-kind exchange
105. Inventory for office supplies.
106. Office building for office equipment.
107. Coke-Cola bonds for General Foods bonds.
108. Farm land for an office building and its land.
109. Personal residence for an apartment building.
110. Land held as an investment for land used in a business.
111. A business use automobile for a personal use automobile.
112. Land in London, England for land in San Francisco, California.
Which of the following qualify as a like-kind exchange?
a.
qualifies as a like-kind exchange
b.
does not qualify as a like-kind exchange
113. Inventory for inventory.
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114. Computer for delivery truck.
115. An airplane for a duplex apartment.
116. Office copier for an office fax machine.
117. A personal residence for a vacation home.
118. Microsoft common stock for Merrill Lynch common stock.
119. Land held as an investment for an office building and land used in a business.
120. A Cadillac automobile used 100% for business for a Ford Mustang automobile used 100% for business.