Chapter 12
1. Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.
a.
True
b.
False
True
2. The basis of replacement property in a nonrecognition transaction is the adjusted basis of the property received less any
deferred gain.
a.
True
b.
False
False
3. The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset’s basis.
a.
True
b.
False
True
4. Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time
requirements for identifying properties and closing the transaction.
a.
True
b.
False
True
5. Simon exchanged his Mustang for Michael’s Econovan so that he could go hunting. The exchange does not qualify as a
like-kind exchange since the assets are personal.
a.
True
b.
False
True
6. When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property
referred to as “boot” can be used to equalize the transaction without disqualifying the nonrecognition transaction.
a.
True
b.
False
True
7. A gain on a like-kind exchange is always recognized to the extent of any boot received.
a.
True
b.
False
False
8. For related parties to qualify for a like-kind exchange, the property received must be held for six months.
a.
True
b.
False
False
9. The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.
a.
True
b.
False
Chapter 12
True
10. An involuntary conversion occurs whenever a loss (but not a gain) is realized from a transaction that occurs against
the taxpayer’s will.
a.
True
b.
False
False
11. The deferral of a gain realized on an involuntary conversion is mandatory.
a.
True
b.
False
False
12. The recognition of a loss realized on an involuntary conversion is mandatory.
a.
True
b.
False
True
13. In general, qualified replacement property for an involuntary conversion must be purchased within one year after the
close of the tax year in which the involuntary conversion occurred.
a.
True
b.
False
False
14. Nancy purchased her houseboat six years ago for $35,000. She has lived in the houseboat since she purchased it. A
friend has offered $62,000 for the houseboat. If she sells it, she will be able to exclude the gain.
a.
True
b.
False
True
15. Ed and Elise got married during the year and they each sold their homes to buy a new house for them to live in. As
long as they file a joint return they can each claim a $250,000 exclusion.
a.
True
b.
False
True
16. Which of the following can be income deferral transactions?
Sale of municipal bonds.
Involuntary conversions of property.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
17. Which of the following can be income deferral transactions?
Chapter 12
Exchanges of like-kind property.
Involuntary conversions of property.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
18. A fire destroyed Jimmy’s Teeshirt Shop. The business had an adjusted basis of $500,000 and a fair market value of
$600,000 before the fire. Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the
proceeds.
Jimmy has a realized gain of $50,000.
Jimmy has a recognized gain of $50,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
19. A fire destroyed Josh’s Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of
$600,000. Josh received $550,000 from the insurance company and used the cash to go to Hawaii.
Josh has a realized gain of $100,000.
Josh has a recognized gain of $50,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
20. Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory?
Involuntary conversion of business real estate.
Like-kind exchange of business real estate.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
21. Rationale for nonrecognition of property transactions exists because of which concept(s) of taxation?
Wherewithal-to-Pay Concept.
Constructive receipt Doctrine.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 12
d.
Neither statement is correct.
a
22. Which of the tax concept(s) allow for the deferral of gains on nonrecognition transactions?
Capital Recovery Concept.
Ability to Pay Concept.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
23. Rationale for nonrecognition includes which of the following?
A refinement of the realization concept, which postpones recognition of appreciation in
value until the taxpayer disposes of a property, or its replacement.
Under the Substance-over-form doctrine, new property acquired in a transaction is
viewed as a continuation of the original investment.
The taxpayer lacks wherewithal to pay the tax on a realized gain because the amount
realized on the transaction is reinvested in the replacement asset.
a.
Only II is correct.
b.
Only I is correct.
c.
II and III are correct.
d.
I, II, and III are correct.
e.
Only III is correct.
24. Commonalties of nonrecognition transactions include that
deferring a loss is mandatory on like-kind exchanges.
deferring a loss is mandatory on involuntary conversions.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
25. Commonalties of nonrecognition transactions include that
gains on all transactions must be recognized when the taxpayer has the wherewithal–to–
pay.
tax attributes carryover from the original asset to the replacement asset.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
26. The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the basis of
the replacement property. These adjustments include
subtracting deferred losses.
adding deferred gains.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
27. Willie owns 115 acres of land with a fair market value of $57,000. He purchased the land as an investment for
$35,000 in 1993. Willie trades the land for a 122-acre parcel adjacent to other property he owns. The 122 acres has a value
of $57,000, and the exchange qualifies for like-kind deferral treatment. What is Willie’s basis in the new parcel of land?
a.
$- 0 –
b.
$17,000
c.
$35,000
d.
$57,000
e.
$74,000
c
28. Randy owns 115 acres of land with a fair market value of $57,000. He purchased the land as an investment for
$35,000 in 1993. Randy trades the land for a 122-acre parcel adjacent to other property he owns. The 122 acres has a
value of $57,000, and the exchange qualifies for like-kind deferral treatment. What is Randy’s realized gain on the
exchange?
a.
$- 0 –
b.
$22,000
c.
$35,000
d.
$57,000
e.
$79,000
29. Wendell owns 115 acres of land with a fair market value of $57,000. He purchased the land as an investment for
$35,000 in 1993. Wendell trades the land for a 122-acre parcel adjacent to other property he owns. The 122 acres has a
value of $57,000, and the exchange qualifies for like-kind deferral treatment. What is Wendell’s recognized gain on the
exchange?
a.
$- 0 –
b.
$22,000
c.
$35,000
d.
$57,000
e.
$79,000
a
30. Karen owns a commercial office building with a fair market value of $140,000. She purchased the building as an
investment for $102,000 in 2003. She has claimed $18,000 in depreciation deductions. Karen trades the building for an
apartment complex. The apartment complex has a value of $140,000, and the exchange qualifies for like-kind deferral
treatment. What is Karen’s basis in the apartment complex?
a.
$- 0 –
Chapter 12
b.
$ 58,000
c.
$ 84,000
d.
$140,000
e.
$198,000
c
31. Fran owns a commercial office building with a fair market value of $850,000. She purchased the building as an
investment for $815,000 in 2006. She has deducted $115,000 in depreciation. Fran trades the building for an apartment
complex. The apartment complex has a value of $850,000, and the exchange qualifies for like-kind deferral treatment.
What is Fran’s recognized gain on the exchange?
a.
$- 0 –
b.
$35,000
c.
$115,000
d.
$150,000
e.
$850,000
a
32. Under the like-kind exchange rules, when like-kind property is traded for like-kind property, a loss on a trade-in is:
a.
recognized and treated as a capital loss.
b.
recognized and treated as an ordinary loss.
c.
not recognized and increases the basis of the replacement property.
d.
not recognized and decreases the basis of the replacement property.
e.
none of the above.
c
33. For a transaction to qualify as a third-party exchange,
The exchange must be completed within 1 year of the first exchange.
The property exchanged must be identified within 45 days of the first exchange.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
34. The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the fair
market value of the replacement property. These adjustments include
adding boot received.
subtracting deferred gains.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
35. Which of the following qualifies as a like-kind exchange of property?
Chapter 12
Commercial retail building and its land for an office building and its land.
Louisiana Oil, Inc. common stock for Louisiana Oil, Inc. corporate bonds.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
36. Which of the following qualifies as a like-kind exchange of property?
Inventory for inventory.
Office equipment for a delivery van.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
37. Which of the following exchanges of property are like-kind exchanges?
Common stock of Intel traded for preferred stock of Intel.
Principal residence traded for 20 acres of undeveloped investment land.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
38. Which of the following exchanges of property are like-kind exchanges?
Convenience store owner trades several cases of potato chips for a cash register.
A completely rented apartment building traded for a parts supply warehouse to use in
business.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
39. Which of the following qualifies as a like-kind exchange of property?
Registered trademark for a copyright.
A 2009 Chevy, business-use automobile for a 2010 Ford, business-use automobile
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 12
40. No taxable gain or loss is recognized on a like-kind exchange of an investment asset for a similar asset that will be
held for investment if both assets consist of
a.
Partnership interests.
b.
Convertible debentures.
c.
Mortgage notes
d.
Rental real estate located in different states.
e.
Common stock of companies in the same industry.
41. Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for Roscoe’s
investment realty with a basis of $170,000. Roscoe plans to hold the new realty for investment. What is the amount
realized for the property given up by Roscoe?
a.
$160,000
b.
$170,000
c.
$190,000
d.
$200,000
e.
$210,000
e
42. Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for his investment
realty with a basis of $170,000. Roscoe plans to hold the new realty for investment. What is his recognized gain?
a.
$- 0 –
b.
$10,000
c.
$20,000
d.
$30,000
e.
$40,000
43. Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for Roscoe’s
investment realty with a basis of $170,000. What is his basis in the new real estate?
a.
$160,000
b.
$170,000
c.
$180,000
d.
$200,000
e.
$210,000
44. Rosilyn trades her old business-use luxury car with an adjusted basis of $13,000 and an outstanding loan liability
balance of $2,000 for a new business-use economy car valued at $9,000 plus $3,000 cash from Bob‘s Auto Sales and Loan
Company. Bob assumes Rosilyn’s loan balance. What is Rosilyn’s amount realized on the transaction?
a.
$3,000
b.
$9,000
c.
$12,000
d.
$13,000
Chapter 12
e.
$14,000
e
45. Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of
$2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob
assumes Rosilyn’s loan balance. What is Rosilyn’s realized gain on the transaction?
a.
$- 0 –
b.
$1,000
c.
$2,000
d.
$3,000
e.
$5,000
46. Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of
$2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob
assumes Rosilyn’s loan balance. How much boot does Rosilyn receive in the transaction?
a.
$- 0 –
b.
$1,000
c.
$2,000
d.
$3,000
e.
$5,000
e
47. Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of
$2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob
assumes Rosilyn’s loan balance. What is Rosilyn’s recognized gain on the transaction?
a.
$- 0 –
b.
$1,000
c.
$2,000
d.
$3,000
e.
$5,000
48. Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an outstanding loan liability balance of
$2,000 for a new business-use car valued at $9,000 plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob
assumes Rosilyn’s loan balance. What is Rosilyn’s basis in her new car?
a.
$- 0 –
b.
$9,000
c.
$11,000
d.
$12,000
e.
$14,000
49. Rebecca trades in her four-wheel drive truck for a new one. Rebecca’s truck cost $20,000 and has an $8,000 basis on
the date of the trade-in. The price of the new truck is $27,000 and the dealer gives Rebecca a $10,000 trade in allowance
on her old truck. She uses the trucks in her business. What is Rebecca’s basis in the new truck?
a.
$8,000
Chapter 12
b.
$18,000
c.
$25,000
d.
$27,000
e.
$29,000
c
50. Grant exchanges an old pizza oven from his business for a new oven. In addition to the old oven, which has a basis of
$10,000, Grant pays $4,000 cash and takes out a loan on the new oven for $6,000. The new oven is valued at $22,000.
What is Grant’s recognized gain or loss due on this transaction?
a.
$- 0 –
b.
$2,000
c.
$12,000
d.
$16,000
e.
$22,000
a
51. Grant exchanges an old pizza oven from his business for a new oven. In addition to the old oven, which had a basis of
$10,000, Grant pays $4,000 cash and takes out a loan on the new oven for $6,000. The new oven is valued at $22,000.
What is Grant’s basis in the new oven?
a.
$12,000
b.
$16,000
c.
$20,000
d.
$22,000
e.
$32,000
c
52. Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the
same business. He purchased the machine 3 years ago for $22,000 and had taken depreciation of $9,000 on the machine.
In the exchange, Norman also receives $3,000 of cash. As a result of the exchange,
Norman realizes a loss of $4,000 on the exchange.
Norman’s basis in the acquired machine is $13,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
53. Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the
same business. He purchased the machine 3 years ago for $22,000 and has taken depreciation of $9,000 on the machine.
In the exchange, Norman also receives $3,000 of cash. As a result of the exchange,
Norman’s basis in the acquired machine is $10,000.
Norman recognizes a loss of $3,000 on the exchange.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 12
d.
Neither statement is correct.
a
54. Lindsey exchanges investment real estate parcels with Donna. Her adjusted basis in the property is $400,000, and it is
encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna’s property is appraised at
$1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is the
amount of gain recognized by Lindsey?
a.
$- 0 –
b.
$100,000
c.
$200,000
d.
$500,000
e.
$900,000
55. Lindsey exchanges investment real estate parcels with Donna. Lindsay’s adjusted basis in the property is $400,000,
and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna’s property is appraised at
$1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is Lindsey’s
basis in the new real estate?
a.
$- 0 –
b.
$100,000
c.
$200,000
d.
$400,000
e.
$600,000
56. Justin trades an office building located in Michigan to John for an apartment complex located in North Carolina.
Details of the two properties:
Justin
John
Michigan
N. Carolina
Fair market value
$9,000,000
$4,000,000
Adjusted basis
3,000,000
3,000,000
Liabilities transferred with property
2,000,000
-0-
In addition, John pays Justin $3,000,000 cash as part of this transaction. What is the gain (loss) recognized by John in this
transaction and what is his basis in the Michigan property?
Gain Recognized Adjusted Basis
a.
$1,000,000 $9,000,000
b.
$ -0- $8,000,000
c.
$1,000,000 $6,000,000
d.
$ -0- $9,000,000
e.
Some other amounts
57. Robert trades an office building located in Tennessee to John for an apartment complex located in New Jersey. Details
of the two properties:
Robert
John
Tennessee
N. Jersey
Fair Market Value
$9,000,000
$4,000,000
Chapter 12
Adjusted Basis
3,000,000
3,000,000
Liabilities transferred with property
2,000,000
-0-
In addition, John pays Robert $3,000,000 cash as part of this transaction. What is the gain (loss) recognized by Robert in
this transaction and what is his basis in the New Jersey property?
Gain Recognized Adjusted Basis
a.
$6,000,000 $4,000,000
b.
$5,000,000 $3,000,000
c.
$3,000,000 $2,000,000
d.
$5,000,000 $4,000,000
e.
Some other amounts
58. Matthew exchanges an investment apartment building for a parcel of land. The apartment building has a fair market
value of $80,000 and an adjusted basis of $95,000. The land’s value is $60,000. Matthew receives $20,000 cash in the
exchange. What is Matthew’s recognized gain or (loss) on the exchange and his basis in the land?
Gain (Loss) Recognized Basis
a.
$ – 0 – $75,000
b.
$(15,000) $65,000
c.
$(35,000) $85,000
d.
$20,000 $30,000
e.
$15,000 $35,000
a
59. Cindy exchanges investment real estate with Russell. Cindy purchased her realty two years ago for $280,000, and it is
encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged. Russell paid $80,000
cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange. Russell assumes the debt on his
new land and pays Cindy enough in cash to balance the exchange. What is Cindy’s recognized gain (loss) on the
exchange?
a.
$-0-
b.
$40,000
c.
$100,000
d.
$170,000
60. Belinda exchanges investment real estate with Russell. Belinda’s adjusted basis in her two-year old property is
$280,000. The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when
exchanged. Russell assumes that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000
on the day of the exchange. Russell pays Belinda enough in cash to balance the exchange. What is Belinda’s basis in the
new land?
a.
$20,000
b.
$150,000
c.
$280,000
d.
$320,000
61. Violet exchanges investment real estate with Russell. Violet’s adjusted basis in her two-year old property is $280,000.
Chapter 12
The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged. Russell
assumes that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the
exchange. Russell pays Violet enough in cash to balance the exchange. What is Russell’s recognized gain (loss) on the
exchange?
a.
$-0-
b.
$70,000
c.
$80,000
d.
$150,000
a
62. Sarah exchanges investment real estate with Russell. Sarah’s adjusted basis in her two-year old property is $280,000.
The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged. Russell
assumes that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the
exchange. Russell pays Sarah enough in cash to balance the exchange. What is Russell’s basis in the new land?
a.
$80,000
b.
$180,000
c.
$250,000
d.
$320,000
e.
None of the above
c
63. If related parties complete a qualified like-kind exchange, how long must the parties wait before disposing of the
property exchanged to insure that any realized gain on the transfer is not recognized?
a.
No waiting.
b.
30 days.
c.
6 months.
d.
1 year.
e.
2 years.
e
64. Norm acquired office equipment for his business at a cost of $10,000. After two years of use, Norm exchanges the
equipment for different equipment with a fair market value of $7,000. MACRS depreciation on the original equipment
was $4,753 The exchange qualifies as a like-kind exchange. Immediately after the exchange Norm sells the new
equipment for $7,000 cash. What is the amount and character of the gain recognized?
a.
No gain or loss.
b.
$1,753 Section 1231 gain.
c.
$1,753 Section 1245 ordinary income.
d.
$4,753 Section 1231 gain.
e.
$4,753 section 1245 ordinary income, and $3,000 Section 1231 loss.
c
65. Nancy acquired office equipment for her business in 2011 at a cost of $15,000. During the current year, she exchanges
the equipment for different equipment with a fair market value of $9,000. MACRS depreciation on the original equipment
was $9,828. The exchange qualifies as a like-kind exchange. Immediately after the exchange Nancy sells the new
equipment for $9,000 cash. What is the amount and character of the gain recognized?
a.
No gain or loss.
b.
$3,828 Section 1231 gain.