CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF GAIN

1. Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2014. If the insurance settlement was $950,000 (received March 1, 2015), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

a. December 31, 2014.

b. August 31, 2015.

c. December 31, 2016.

d. August 31, 2017.

e. None of the above.

2. Which of the following statements is correctfor a § 1033 involuntary conversion of an office building which is destroyed by fire?

a. An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.

b. The postponement of realized gain in a § 1033 involuntary conversion is elective.

c. The functional use test is satisfied if a business warehouse is replaced with another business warehouse.

d. The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.

e. All of the above are correct.

3. Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion?

a. Al’s business warehouse is destroyed by a tornado on October 31, 2014. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2014. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2016.

b. Heather’s personal residence is destroyed by fire on October 31, 2014. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2014. She purchases another principal residence with the proceeds on October 31, 2016.

c. Mack’s office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2014. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2017.

d. Lizzy’s business automobile is destroyed in an accident on October 31, 2014. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2014. She purchases another business automobile with the proceeds on June 1, 2017.

e. All of the above.

4. Sam’s office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2014. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2015. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2017. What is Sam’s recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

a. $0; $720,000.

b. $30,000; $750,000.

c. $30,000; $845,000.

d. $150,000; $750,000.

e. None of the above.

5. A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was

$400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?

a. $0 and $450,000.

b. $0 and $460,000.

c. ($10,000) and $440,000.

d. ($10,000) and $450,000.

e. None of the above.

6. If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is:

a. The cost of the replacement property.

b. The fair market value of the involuntarily converted property minus the postponed gain.

c. The cost of the replacement property minus the postponed gain.

d. The amount realized.

e. None of the above.

7. Myrna’s personal residence (adjusted basis of $100,000) was condemned, and she received a condemnation award of $80,000. Myrna used the condemnation proceeds to purchase a new residence for $90,000. What is her recognized gain or loss and her basis in the new residence?

a. $0; $70,000.

b. $0; $90,000.

c. ($20,000); $90,000.

d. ($20,000); $70,000.

e. None of the above.

8. Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran’s recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?

a. $0 and $375,000.

b. $0 and $425,000.

c. ($50,000) and $325,000.

d. ($50,000) and $375,000.

e. None of the above.

9. Evelyn, a calendar year taxpayer, lists her principal residence with a realtor on February 7, 2014, enters into a contract to sell on July 12, 2014, and sells (i.e., the closing date) the residence on August 1, 2014. The realized gain on the sale is $225,000. Which date is the appropriate ending date in determining if the residence has been owned and used by the Evelyn as the principal residence for at least two years during the prior five-year period?

a. February 7, 2014.

b. b. July 12, 2014.

c. August 1, 2014.

d. December 31, 2014.

e. None of the above.

10. During 2014, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker’s commissions and other selling expenses being $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence?

a. $0.

b. $141,000.

c. $162,000.

d. $191,000.

e. None of the above.