15
Nontaxable Exchanges
Solutions to Tax Research Problems
15-50 Regulation § 1.1031(j)-l deals with exchanges of multiple properties. Under this
regulation, assets must be broken down into exchange groups. An exchange group
is made up of assets of like-kind or like-class, as defined in Reg. § 1.1031(a)-2. In
this example, the exchange groups are fairly obvious: automobiles, computers,
and other. Since the goodwill and covenant-not-to-compete do not qualify as like-
class properties, T recognizes $90,000 and U recognizes $60,000.
U has an exchange group deficiency for the automobiles. His gain recognized
on the autos is the lesser of the gain realized on the autos or the exchange group
deficiency ($50,000). Since U’s basis is not given, this cannot be determined.
T has an exchange group deficiency on the computers. His gain recognized on
the computers is the lesser of the exchange group deficiency ($30,000) or the gain
realized on the computers [$60,000 — $65,000 = ($5,000)]. T recognizes no gain
or loss on the computers because losses are not recognized.
In summary, T recognizes gain of $90,000 due to the goodwill and the
covenant-not-to-compete.
Nontaxable Exchanges
Test Bank
True or False
________ 1. A taxpayer is able to use § 121 even if he or she temporarily rents his or
her primary residence while trying to sell it.
________ 2. B purchased a residence on April 12, 20X1 for $120,000. B moved in
immediately and lived in the home until it sold for $165,000 on March
25, 20X4. B may exclude all of the gain even though the home was not
owned for five years.
________ 3. A loss on the sale of a principal residence may be deducted in the year of
sale as a capital loss.
________ 4. C purchased a mobile home for $78,000 for use as her residence on June
12, 20X1. She moved in immediately. On June 12, 20X2, C was
transferred to a new job. She rented the mobile home for six months
before she sold it for $108,000. C may exclude $15,000 (i.e., $30,000
gain × 1 year/2 years).
________ 5. K currently owns two residences. She lived in the first from January 1,
20X1 until June 30, 20X4. She lived in the second from July 1, 20X4
until June 30, 20X6. Both residences have been owned since January 1,
20X1 and were either rented or vacant when not occupied by K. K can
sell both residences on June 30, 20X6 and exclude her entire gain.
________ 6. J and H sold their jointly owned residence at a $325,000 gain during the
current year. J owned the residence for four years and lived in it the
entire time. After their wedding, J transferred a one-half interest to H,
who immediately moved in and lived in the home for 18 months. J and H
can exclude only $250,000 of their gain.
________ 7. If a husband and wife divorce and their jointly owned residence is
transferred to one spouse six months after the divorce, no gain or loss is
recognized.
________ 8. A single taxpayer who meets the ownership and use tests may exclude
gain of $250,000 on the sale of her principal residence under § 121. Any
gain in excess of $250,000 must be recognized.
________ 9. If a husband and wife own their principal residence jointly, both must
meet the ownership and occupancy tests to exclude the gain under § 121.
________ 10. Section 121 could apply to a boat used as a principal residence and sold
at a gain.
________ 11. An involuntary conversion due to a casualty need not meet the
“suddenness” test that is applied to the casualty loss deduction.
________ 12. Involuntary conversion treatment under § 1033 applies to gains and
losses.
________ 13. An involuntary conversion of rental real estate property requires
replacement with property that serves the same “taxpayer use.” This
means that the property need only be replaced with other rental property.
________ 14. Section 1033, dealing with involuntary conversions, is mandatory if all
requirements are met (even if the taxpayer receives only cash).
________ 15. Growing timber that is leveled by a natural disaster may be sold in its
normal market. If it is replaced, the gain can be deferred if it is replaced
by property that is similar or related in use.
________ 16. A taxpayer who owns rental property that lies in the formally announced
path of a future highway may sell the property to a private party and
defer any gain just as if the property had been condemned by a
government agency.
________ 17. The owner/operator of a hamburger stand that has been condemned to
make way for a highway must find replacement property of similar
“functional” use to defer gain under § 1033.
________ 18. Bonds and debentures do not qualify for like-kind exchange treatment.
________ 19. U.S. currency is always considered boot in a like-kind exchange.
________ 20. Like-kind exchange treatment only applies if no property other than
“like-kind property” is received.
________ 21. Liabilities discharged generally are treated as boot, equivalent to money,
received in a like-kind exchange.
________ 22. Like-kind exchange treatment is elective.
________ 23. G exchanged a rent house for another specified rent house to be received
five months later. This qualifies as a like-kind exchange.
________ 24. F exchanged a vacant lot held for investment for a factory building to be
used in her manufacturing business. These properties are like-kind
properties to F.
________ 25. Y exchanges a rent house, which he owned outright (i.e., no liabilities
existed), for an apartment complex. The apartment complex was subject
to a $150,000 mortgage, and to make the deal even, Y received $3,400
cash. Y must recognize part or all of the realized gain on this exchange.
________ 26. Many changes in the form of doing business, such as the receipt of an
interest on formation of a partnership in exchange for property, are
allowed to occur without gain recognition.
Multiple Choice
________ 27. Which of the following is not true of principal residences?
a. “Principal residence” can refer only to property which the taxpayer
owns.
b. A taxpayer cannot occupy two principal residences at the same time.
c. If a taxpayer rents out his or her former principal residence while
trying to sell it, it may still qualify as the taxpayer’s principal
residence for purposes of § 121.
d. A taxpayer can exclude gain only on the sale of one property every
two years.
________ 28. J sold her qualifying personal residence for $275,000. She incurred
selling expenses of $6,000 and “fix-up expenses” of $3,000. J’s adjusted
basis in her residence was $137,000. What are the amounts of J’s gain
realized and gain recognized, respectively?
a. $132,000; $132,000
b. $132,000; $0
c. $129,000; $0
d. $129,000; $129,000
________ 29. P, a single individual, purchased a new home on April 1, 20X1 for
$375,000. On July 1, 20X2, P sold the property for $490,000, so she
could take a new job 300 miles from her old home. The new job
involved a promotion. How much gain must P recognize?
a. $115,000
b. $71,875
c. $44,125
d. $0
________ 30. Q, a single individual, purchased a new home on July 1, 20X1 for
$265,000. On July 1, 20X2, Q moved into a convalescent home due to a
chronic disease. The home remained vacant for three months and was
rented for nine months while Q was institutionalized. Then the home was
sold at a gain of $175,000. How much gain must Q recognize?
a. $175,000
b. $50,000
c. $87,500
d. $0
________ 31. Y owns a home in which she has lived with her spouse, Z, for seven
years. On June 2, 20X2, the home was sold at a gain of $325,000. How
much gain must Y recognize?
a. $325,000 if Y files separately
b. $0 if Y and Z file jointly
c. $75,000, regardless of filing status
d. $0, regardless of filing status
________ 32. Which of the following is true of the exclusion of gain under § 121?
a. The taxpayer (or spouse) must be 55 years of age or older on the date
of sale of the principal residence in order to apply the exclusion.
b. The residence must have been used as a principal residence by the
owner/taxpayer (or spouse) for at least two years within the five-year
period ending on the date of sale.
c. The exclusion is elective but may not be revoked.
d. The exclusion may be used only once by a taxpayer.
________ 33. Which of the following is true about the gain excluded on the sale of a
personal residence by certain individuals?
a. The taxpayer generally must be at least 55 years of age on the date of
sale. If husband and wife sell a jointly owned residence, both must be
at least 55 years of age.
b. The residence must have been used by the taxpayer as his/her
personal residence for at least five of the seven years preceding the
sale.
c. Any portion of gain in excess of the limit must be recognized.
d. Only one residence qualifies for this exclusion during a person’s
lifetime.
________ 34. Q, who is 62 years of age, sold her principal residence for $340,000 and
elected to exclude the maximum amount under § 121 for an unmarried
person. The residence cost $85,000 several years ago. Selling costs of
$3,000 were incurred. If Q purchases a replacement residence within two
years for $120,000, how much gain must she recognize and what is her
basis in the replacement home, respectively?
a. $252,000; $120,000
b. $2,000; $0
c. $2,000; $120,000
d. $126,000; $120,000
________ 35. Which of the following is not considered an involuntary conversion?
a. Voluntary sale of property after public announcement that it will be
condemned for use as a highway right of way
b. Weather damage that meets all tests for casualty loss treatment
except the suddenness test
c. Theft of property
d. Actual condemnation of property because it was structurally
unsuitable for occupancy
________ 36. Which of the following is not necessarily true of the replacement
property in an involuntary conversion?
a. The replacement property must be purchased within two years of the
conversion.
b. If the converted property is real estate used by the taxpayer, the
replacement property must serve the same basic function as the
converted property.
c. For condemned real property used in a business, broader groups of
replacement properties and a longer reinvestment period (an
additional year) are allowed.
d. The replacement property may not have been owned by the taxpayer
prior to the conversion or the threat of condemnation.
________ 37. D owned a building with an adjusted basis of $40,000 that was destroyed
by fire. Insurance paid $55,000 in a settlement. Assuming D reinvests
$52,000 in eligible property within the statutory period, which of the
following is a possible outcome?
a. Gain of $3,000 is recognized by D, and the basis in the new property
is $40,000.
b. No gain is recognized by D, and the basis in the new property is
$40,000.
c. Gain of $15,000 is recognized by D, and the basis in the new
property is $52,000.
d. More than one of the above
________ 38. An apartment complex owned by H, a calendar year individual taxpayer,
was destroyed in a landslide on January 12, 19X6. The apartments
(including the land) had cost $600,000 and had an adjusted basis of
$250,000. The insurance company paid $445,000 for the land and
damaged buildings on March 12, 19X6. Which of the following is not
necessarily true?
a. To be eligible for deferral, H must purchase other real estate to be
used as rental property.
b. To be eligible for deferral, H must reinvest by March 12, 19X8.
c. In order to avoid recognizing any gain on this insurance settlement,
H must reinvest at least $445,000.
d. Even if H reinvests, the $195,000 gain can be recognized, and the
basis in the replacement will be its full cost.
________ 39. A warehouse owned and used by Company Z was involuntarily
converted by casualty. Which of the following will qualify as a
replacement property, subject to nonrecognition of gain?
a. Another warehouse purchased, provided that the amount reinvested
equals or exceeds the amount realized from the converted property
b. A vacant parcel of land
c. Rental real property
d. Another warehouse already owned by Company Z
e. More than one of the above
________ 40. G lost his small manufacturing facility to fire during the current year.
The building originally cost $35,000 and had been depreciated in the
amount of $22,000. His insurance company paid him $42,000 for a total
loss, and he had a new building constructed 18 months later at a cost of
$40,500. How much gain must G recognize on this casualty?
a. $5,500
b. $29,000
c. $13,000
d. $1,500
________ 41. Which of the following types of business or investment property are not
excluded from like-kind exchange treatment?
a. Securities
b. Livestock of the same species but exchanged for the other sex
c. Inventory held for sale
d. Business machines
________ 42. Which of the following is not true of like-kind exchange treatment?
a. It is mandatory.
b. It applies to losses as well as gains.
c. Liabilities discharged generally are treated as boot received.
d. It applies to exchanges of inventory.
________ 43. D exchanged an apartment complex that he had owned for eight years
for farm land. The apartment complex was worth $1,050,000 and D’s
basis was $475,000. The transferee assumed a note secured by an
interest in the property of $800,000. D received $10,000 cash and
assumed liability for loans against the farm land he received in the
amount of $700,000. How much is D’s gain recognized and his basis in
the farm land (fair market value = $940,000), respectively?
a. $110,000 and $475,000
b. $110,000 and $465,000
c. $0 and $365,000
d. $10,000 and $375,000
________ 44. Which of the following exchanges of property (used for business or
investment purposes) are not like-kind exchanges?
a. Warehouse for condominium
b. Beach house for yacht
c. Cadillac business car for an Escort business car
d. Apartment building for vacant lot
________ 45. Which of the following is not true of like-kind exchanges of real
property?
a. Improved real estate is not considered a like-kind exchange for
unimproved real estate.
b. A lease on real property with a remaining term of at least 30 years is
treated as real property in a like-kind exchange.
c. Condemned real estate in an involuntary conversion is treated under
the like-kind rules.
d. Real property in a like-kind exchange need not be of the same class.
________ 46. B exchanges investment land with an adjusted basis of $40,000 for
another parcel of investment land with a fair market value of $50,000
plus $12,000 in cash. What is B’s recognized gain on this exchange?
a. $12,000
b. $20,000
c. $22,000
d. No gain is recognized.
________ 47. B exchanges investment land with an adjusted basis of $55,000 for
another parcel of investment land with a fair market value of $50,000
plus $12,000 in cash. B recognizes how much gain?
a. $12,000
b. $7,000
c. $5,000
d. No gain is recognized.
________ 48. B transfers investment land with an adjusted basis of $70,000 for other
investment land with a fair market value of $50,000 plus $12,000 in
cash. B recognizes how much gain or loss?
a. $20,000 loss
b. $8,000 loss
c. $12,000 gain
d. No gain or loss is recognized.
________ 49. M traded in her business computer at a local dealer. Her cost in the old
machine was $3,500 and her basis was $1,470. She paid $1,500 cash in
the trade for a computer worth $4,000. How much is M’s recognized
gain or loss, and what is her basis in the new computer, respectively?
a. $0 and $1,470
b. $0 and $2,970
c. $1,030 and $4,000
d. $530 and $3,500
________ 50. M exchanged a vacant lot worth $32,500 for farm land worth $28,500.
M received $1,000 down and will receive $1,000 per year for each of the
three following years. M’s basis in the lot was $29,000. How much gain
must M recognize in each of the four years, respectively?
a. $1,000; $1,000; $1,000; $500
b. $875; $875; $875; $875
c. $3,500; $0; $0; $0
d. $500; $1,000; $1,000; $1,000
________ 51. Which of the following is not true of boot in a like-kind exchange?
a. Liabilities discharged in a like-kind exchange are considered boot
received.
b. Boot received (other than liabilities) can be offset by net liabilities
incurred.
c. The receipt of boot does not cause the recognition of any realized
losses in a like-kind exchange.
d. The payment of boot may be offset against liabilities discharged.
________ 52. X exchanged rental property worth $40,000 with an adjusted basis of
$25,000 and no liabilities, for Y’s rental property worth $75,000 which
had an adjusted basis of $57,000 and which was subject to a mortgage of
$40,000. Y also transferred to X $5,000 worth of stock in which Y had
an adjusted basis of $3,000. The gains recognized by X and Y,
respectively, in this exchange are:
a. $5,000; $18,000
b. $13,000; $22,000
c. $13,000; $20,000
d. $5,000; $20,000
________ 53. In order to qualify for nonrecognition, property acquired in a delayed
exchange must be
a. Specified by the transferee as the replacement property within 45
days after the date when the transferor surrenders the property
b. Received by the transferee within 180 days of the transfer, but no
later than the due date including extensions, of the tax return for the
year in which the transfer occurs
c. Both a. and b.
d. Either a. or b.
________ 54. Which of the following exchanges is not considered a nontaxable
transaction?
a. Transfer of property to a partnership in exchange for a partnership
interest
b. Transfer of property owned by a controlling shareholder to the
corporation in exchange for stock
c. Exchange of common stock for common stock of the same
corporation
d. All of the above are nontaxable transactions.
________ 55. Which of the following is not true of rollover gains from low-income
housing sales?
a. The gain on the sale may be deferred if the property is sold to the
tenants, a tenant cooperative, or any nonprofit organization formed
for the sole benefit of the tenants.
b. To qualify for a deferral, the sale must be approved by the Secretary
of Housing and Urban Development.
c. The owner of the property may defer gain indefinitely until another
qualified low-housing project is purchased.
d. Both b. and c, above, are not true.
________ 56. A gain may be deferred on the exchange of a life insurance contract for
a. Another life insurance policy.
b. Certain annuity contracts.
c. Certain endowment contracts.
d. All of the above.
15
Nontaxable Exchanges
Solutions to Test Bank
True or False
Multiple Choice
15
Nontaxable Exchanges
Comprehensive Problems
Solutions to Comprehensive Problems
