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Exam 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

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Question 41

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Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922. Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922).

A) True
B) False

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Question 42

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Parker bought a brand new Ferrari on January 1, 2014, for $125,000. Parker was fatally injured in an auto accident on June 23, 2014, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on January 1, 2014.

A) True
B) False

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Question 43

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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?

Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000). In addition, she receives $100,000 of cash. Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).

Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2011. In the current tax year (2014) , she sells 25 shares of the 100 shares purchased on January 1, 2011, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Karen's recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?

After 5 years of marriage, Dave and Janet decided to get a divorce. As part of the divorce settlement, Janet transfers to Dave the house she purchased prior to their marriage. Janet's adjusted basis for the house is $230,000 and the fair market value is $410,000 on the date of the transfer. What are the tax consequences to Janet and to Dave as a result of the transfer?

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?

The holding period for property acquired by gift is automatically long term.

On January 5, 2014, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000. He has owned and occupied the residence for 15 years. He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale. One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000. On October 15, 2014, Waldo purchases a new home for $600,000. On November 15, 2015, he pays $25,000 for completion of a new room on the house, and on January 14, 2016, he pays $15,000 for the construction of a pool. What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot? Recognized gain Basis A) $\begin{array}{ll}\$ 0 &&& \$ 75,000 \\\end{array}$ B) $\begin{array}{ll}\$ 0 &&& \$ 90,000 \\\end{array}$ C) $\begin{array}{ll}\$ 15,000 & \$ 75,000 \\\end{array}$ D) $\begin{array}{ll}\$ 15,000 & \$ 90,000 \\\end{array}$ E) $\begin{array}{ll}\$ 30,000 & \$ 105,000\end{array}$

Lucinda, a calendar year taxpayer, owned a rental property with an adjusted basis of $312,000 in a major coastal city. Her property was condemned by the city government on October 12, 2014. In order to build a convention center, Lucinda eventually received qualified replacement property from the city government on March 9, 2015. This new property has a fair market value of $410,000. a. What is Lucinda's recognized gain or loss on the condemnation? b. What is her adjusted basis for the new property? c. If, instead of receiving qualifying replacement property, Lucinda was paid $410,000, what is the latest date that she can acquire qualifying replacement property?

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

A realized gain on an indirect (conversion into money) involuntary conversion of business property can be postponed, but a realized loss on an indirect involuntary conversion of business property cannot be postponed.

Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?

Annette purchased stock on March 1, 2014, for $200,000. At December 31, 2014, it was worth $210,000. She also purchased a bond on September 1, 2014, for $20,000. At year end, it was worth $15,000. Determine Annette's realized and recognized gain or loss.

For the following exchanges, indicate which qualify as like-kind property. a. Inventory of a sporting goods store in Charleston for inventory of an appliance store in Savannah. b. Inventory of a ladies dress shop in Cleveland for inventory of a ladies dress shop in Richmond. c. Investment land in Virginia Beach for office building in Williamsburg. d. Used automobile used in a business for a new automobile to be used in the business. e. Investment land in Paris for investment land in San Francisco. f. Shares of Texaco stock for shares of Exxon Mobil stock.

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?

If boot is received in a § 1031 like­kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

Eunice Jean exchanges land held for investment located in Rolla, Missouri, for land to be held for investment located near Madrid, Spain. Her basis for the land given up is $450,000 and the fair market value of the land received is $500,000. Eunice Jean also receives cash of $45,000. a. What is Eunice Jean's recognized gain? b. What is her basis for the land received?