CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF GAIN

1. During 2014, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker’s commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain?

a. $0.

b. $17,000.

c. $27,000.

d. $527,000.

e. None of the above.

2. During 2014, Zeke and Alice, a married couple, decided to sell their residence, which had a basis of $200,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately. They sold the house in May for $800,000. Broker’s commissions and other selling expenses amounted to $50,000. They purchased a new residence in July for $400,000. What is the recognized gain and the adjusted basis of the new residence?

a. $45,000 and $400,000.

b. $50,000 and $400,000.

c. $100,000 and $600,000.

d. $550,000 and $800,000.

e. None of the above.

3. Carl sells his principal residence, which has an adjusted basis of $150,000 for $200,000. He incurs selling expenses of $20,000 and legal fees of $2,000. He had purchased another residence one month prior to the sale for $380,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?

a. $0 and $380,000.

b. $0 and $408,000.

c. $28,000 and $352,000.

d. $28,000 and $380,000.

e. None of the above.

4. Ross lives in a house he received as a gift from his father. His father had lived in the house for 12 years. The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000. Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000. He incurs selling expenses of $7,000. What is Ross’ recognized gain or loss and basis for the new residence?

a. ($17,000); $125,000.

b. ($17,000); $142,000.

c. $3,000; $125,000.

d. $3,000; $128,000.

e. None of the above.

5. Paula inherits a home on July 1, 2014 that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent’s death. She decides to sell her old principal residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2014, she sells the old residence for $600,000. Paula incurs selling expenses of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2014. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

a. $0; $500,000.

b. $193,000; $600,000.

c. $443,000; $600,000.

d. $475,000; $600,000.

e. None of the above.

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6. Weston sells his residence to Joanne on October 15, 2014. Indicate which of the following statements is correctly associated with § 121 (exclusion of gain on sale of principal residence).

a. Selling expenses decrease the seller’s amount realized and increase the buyer’s adjusted basis.

b. Repair expenses of the seller decrease the seller’s amount realized and have no effect on the buyer’s adjusted basis.

c. Capital expenditures made by the seller prior to the sale increase the seller’s adjusted basis and have no effect on the buyer’s adjusted basis.

d. Only a. and c.

e. a., b., and c.

7. Eric and Faye, who are married, jointly own a house in which they have resided for the past 17 years. They sell the house for $375,000 with realtor’s fees of $10,000. Their adjusted basis for the house is $80,000. Since they are in their retirement years, they plan on moving around the country and renting. What is their recognized gain on the sale of the residence if they use the § 121 exclusion (exclusion of gain on sale of principal residence) and if they elect to forgo the § 121 exclusion?

With exclusion a. $0	Elect to forgo $0
b. $35,000	$35,000
c. $0	$285,000
d. $35,000	$285,000
e. $285,000	$225,000

8. Lenny and Beverly have been married and living together in Lenny’s home for 6 years. He lived in the home alone for 20 years prior to their marriage. They sell the home, which has an adjusted basis of $120,000, for $700,000. Lenny and Beverly plan to use the § 121 exclusion (exclusion of gain on sale of principal residence). In Beverly’s prior marriage to Dan, Dan sold his principal residence and used the § 121 exclusion. Beverly and Dan filed joint returns during their seven years of marriage. They had lived in Dan’s house throughout their marriage. Dan’s sale had occurred one year prior to the divorce. Lenny and Beverly purchase a replacement residence for $650,000 one month after the sale. What is the recognized gain and basis for the new home?

a. $0; $80,000.

b. $80,000; $150,000.

c. $80,000; $650,000.

d. $330,000; $650,000.

e. None of the above.

9. Which of the following is incorrect?

a. The deferral of realized gain on a § 1031 like­kind exchange is mandatory.

b. The deferral of realized gain on an indirect (into cash and then into qualified property) § 1033 involuntary conversion is mandatory.

c. The taxpayer can elect to forgo the exclusion of realized gain on a § 121 sale of residence.

d. Both b. and c. are incorrect.

e. a., b., and c. are incorrect.

10. Which of the following types of exchanges of insurance contracts qualify for nonrecognition treatment under § 1035?

a. Exchange of life insurance contracts.

b. Exchange of a life insurance contract for an endowment or annuity contract.

c. Exchange of an endowment contract for an annuity contract.

d. Only a. and b.

e. a., b., and c.