Chapter I12

Prentice Hall's Federal Taxation 2015 Comprehensive, 28e (Pope)
Chapter I12 Property Transactions: Nontaxable Exchanges

1) Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition
treatment.
Answer: TRUE
Explanation: Unless a provision in the tax law provides an exclusion of gain, a disallowance of loss or a
deferral of either, a realized gain or loss will be recognized.
Page Ref.: I:12-2
Objective: 1
2) In a like-kind exchange, both the property transferred and the property received must be held by the
taxpayer either for productive use in a trade or business or for investment.
Answer: TRUE
Explanation: Personal use property does not qualify as like-kind property.
Page Ref.: I:12-2
Objective: 1
3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an

investment qualifies for like-kind treatment.
Answer: FALSE
Explanation: The two assets are not of "like-kind," and personal-use assets and marketable securities do
not qualify.
Page Ref.: I:12-2; Example I:12-2
Objective: 1
4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

Answer: FALSE
Explanation: Like-kind treatment is mandatory if the transaction meets the terms of Section 1031.
Page Ref.: I:12-2
Objective: 1
5) Real property exchanged for personal property qualifies as a like-kind exchange.

Answer: FALSE
Explanation: An exchange is not like-kind if one class of property is exchanged for another class.
Page Ref.: I:12-3
Objective: 1
6) An investor exchanges an office building located in Niagara Falls, NY for an office building located in
Niagara Falls, Ontario. The exchange does not qualify as like-kind.
Answer: TRUE
Explanation: Transfers of real property in the U.S. for real property outside the U.S. are not like-kind.
Page Ref.: I:12-3
Objective: 1
1
Copyright 2015 Pearson Education, Inc.
7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

Answer: FALSE
Explanation: An exchange of inventory or securities does not qualify as a like-kind exchange.
Page Ref.: I:12-4
Objective: 1
8) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind
exchange.
Answer: FALSE
Explanation: Partnership interests, along with inventory and marketable securities, are disqualified
assets.
Page Ref.: I:12-4
Objective: 1
9) A sale of property and subsequent purchase of like-kind property may be treated as a like-kind
exchange if the two transactions are interdependent.
Answer: TRUE
Explanation: The tax law does allow for a three party exchange if structured properly.
Page Ref.: I:12-5
Objective: 1
10) For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.
Answer: TRUE
Explanation: The addition of cash or non-like-kind property is needed when the qualifying like-kind
properties being exchanged are not of equal value. Any cash or other property which is not like-kind is
treated as boot.
Page Ref.: I:12-6
Objective: 1
11) The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.
Answer: FALSE
Explanation: Receipt of boot will only cause recognition if gain is realized on the underlying exchange.
Page Ref.: I:12-6
Objective: 1
12) Where non-like-kind property other than cash is received as boot, the amount of the boot is the
property's fair market value.
Answer: TRUE
Explanation: Non-cash boot is always received at fair market value.
Page Ref.: I:12-6
Objective: 1
13) If each party in a like-kind exchange assumes a liability of the other party, only the net liability given
or received is boot.
Answer: TRUE
Explanation: The exchange of liabilities is netted to determine which party is deemed to have received
boot and which party is deemed to have paid boot.
Page Ref.: I:12-7
Objective: 1
2
14) The basis of non-like-kind property received is the basis in the hands of the transferor at the date of
the exchange.
Answer: FALSE
Explanation: Boot is received at fair market value.
Page Ref.: I:12-8
Objective: 1
15) If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be
retained for three years after the exchange to prevent recognition of gain resulting from the original
exchange on a subsequent disposition of the property.
Answer: FALSE
Explanation: The property must be retained for two years.
Page Ref.: I:12-8
Objective: 1
16) The holding period of like-kind property received in a nontaxable exchange begins on the day of the
exchange.
Answer: FALSE
Explanation: The holding period includes the holding period of the like-kind property if that property is
a capital asset or 1231 property.
Page Ref.: I:12-9
Objective: 1
17) The holding period for boot property received begins on the day after the date of the exchange.
Answer: TRUE
Explanation: While the like-kind property may have a carryover holding period, boot received starts a
new holding period.
Page Ref.: I:12-10
Objective: 1
18) The involuntary conversion provisions which allow deferral of gain are mandatory.
Answer: FALSE
Explanation: If a gain is realized on an involuntary conversion, deferral is elective.
Page Ref.: I:12-10 Key Point
Objective: 2
19) If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying
replacement property is acquired within a specified time period at a cost equal to or greater than the
amount realized on the involuntary conversion.
Answer: TRUE
Explanation: The ability to defer the full gain requires the acquisition of qualifying replacement property
with the full proceeds realized within the replacement period.
Page Ref.: I:12-10
Objective: 2
3
20) All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if
qualifying replacement property is acquired within the requisite period of time.
Answer: TRUE
Explanation: A taxpayer can elect deferral of realized gain due to an involuntary conversion if similar
property or property related in service is acquired within a specific time period.
Page Ref.: I:12-10
Objective: 2
21) In an involuntary conversion, the basis of replacement property is its cost reduced by the gain
deferred.
Answer: TRUE
Explanation: The basis of the replacement asset will be its cost reduced by the gain deferred due to the
involuntary conversion election.
Page Ref.: I:12-10
Objective: 2
22) A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.
Answer: FALSE
Explanation: Section 1033 does not apply to losses.
Page Ref.: I:12-11
Objective: 2
23) If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the
property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to
a party other than the governmental unit that is threatening to condemn the property.
Answer: TRUE
Explanation: The general involuntary conversion provisions are modified in the case of condemnation.
One such modification allows the sale of property to a third party when threat of condemnation exists.
Page Ref.: I:12-11
Objective: 2
24) When the cost of replacement property is less than the amount realized on an involuntary conversion,
gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the
replacement property, but not more than the total realized gain.
Answer: TRUE
Explanation: Proceeds from an involuntary conversion that are not invested in qualifying replacement
property will trigger gain recognition equal to the excess proceeds or the realized gain, if less.
Page Ref.: I:12-12
Objective: 2
25) If property is involuntarily converted into similar property, the basis and holding period of the
converted property carry over to the basis and holding period of the replacement property.
Answer: TRUE
Explanation: Because the gain on the original asset is deferred into the replacement property under the
involuntary conversion provisions, the holding period and basis of the original asset also carry over to the
replacement asset.
Page Ref.: I:12-12
Objective: 2
4
26) If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the
replacement property begins on the date of purchase.
Answer: FALSE
Explanation: The holding period includes the holding period of the converted property.
Page Ref.: I:12-12
Objective: 2
27) Replacing a building with land qualifies as replacement property under the involuntary conversion
rules relevant to a casualty.
Answer: FALSE
Explanation: Qualification of replacement property is based on a functional use test.
Page Ref.: I:12-13
Objective: 2
28) If real property used in a trade or business or held for investment is condemned, it must be replaced
with property having a similar functional use.
Answer: FALSE
Explanation: The like-kind replacement property rules apply in the case of a condemnation of real
property used in a trade or business or held for investment purposes.
Page Ref.: I:12-14
Objective: 2
29) Vector Inc.'s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally
settles with the insurance company on February 3, 2015. In order to defer the gain realized on the
building, Vector must acquire another office building by February 3, 2017.
Answer: FALSE
Explanation: The deadline for replacement is the end of the second tax year after the year in which the
gain is realized. The deadline will be December 31, 2017.
Objective: 2
30) When an involuntary conversion is due to the condemnation of real property held for productive use
in a trade or business or for investment, the replacement period will end three years after the close of the
first tax year in which any part of the gain is realized.
Answer: TRUE
Explanation: An extra year is added to the replacement period for condemnation of real estate.
Page Ref.: I:12-15
Objective: 2
31) A loss on the sale of a taxpayer's personal residence is deductible if the taxpayer owned and lived in
the home for two of five years.
Answer: FALSE
Explanation: A loss is disallowed because the residence is a personal-use asset.
Page Ref.: I:12-16
Objective: 3
5
32) In order for the gain on the sale of a personal residence to be excluded under Section 121, a
replacement residence must be purchased within two years.
Answer: FALSE
Explanation: There is no requirement for a replacement residence.
Page Ref.: I:12-16
Objective: 3
33) In the case of married taxpayers, an individual may claim the Sec. 121 exclusion even if the
individual's spouse used the exclusion within the past two years.
Answer: TRUE
Explanation: The exclusion is now determined on an individual basis.
Objective: 3
34) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
Answer: FALSE
Explanation: The home must be the taxpayer's principal residence for two of the five years before the sale.
Page Ref.: I:12-16 and I:12-17
Objective: 3
35) If a taxpayer owns more than one home, she can designate the home that will be considered her
principal residence for purposes of the Sec. 121 exclusion.
Answer: FALSE
Explanation: The determination of principal residence is based upon facts and circumstances such as
place of employment, voter registration, club memberships and numerous other factors.
Objective: 3
36) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be
excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
Answer: TRUE
Explanation: Under specified circumstances a taxpayer may be allowed partial exclusion if the two-year
test is not met.
Page Ref.: I:12-19
Objective: 3
37) Ron and Fay live in Buffalo. They also own a condominium in Orlando (purchased in 2009) which they
rent to vacationers. Ron and Fay will be retiring. They plan to live in the Orlando property for two and a
half years. When they sell it, they will be able to exclude the full gain which is expected to be about
$200,000.
Answer: FALSE
Explanation: The gain will be allocated between the rental period and the primary residence period.
Only the portion allocable to the primary residence period can be excluded. In addition, depreciation
must be recaptured.
Page Ref.: I:12-20
Objective: 3
6
38) All of the following qualify as a like-kind exchange except

A) an apartment building held for investment for farmland used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a general purpose truck used in trade or business.
Answer: D
Explanation: D) Real property used in business or for investment exchanged for any real property
qualifies as do computers and peripherals. An airplane and a truck are in different general asset classes
and are, therefore, not like-kind property.
Page Ref.: I:12-3 and I:12-4; Example I:12-3, I:12-4, I:12-7, and I:12-8
Objective: 1
39) Which of the following statements with respect to a like-kind exchange is false?
A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind
exchange.
Answer: D
Explanation: D) Sale of property and subsequent purchase of like-kind property only qualifies if the two
transactions are interdependent.
Page Ref.: I:12-3 through I:12-5
Objective: 1
40) A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is
willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B
purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A's ranch. The
ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?
A) The transaction qualifies as a like-kind exchange for B but not for A.
B) The transaction qualifies as a like-kind exchange for both B and A.
C) The transaction qualifies as a like-kind exchange for A but not for B.
D) The transaction does not qualify as a like-kind exchange for either B or A.
Answer: C
Explanation: C) The exchange is like-kind for A because she exchanges real property used in business
(the ranch) for investment property (the complex) in a direct exchange. The transaction is not a like-kind
exchange for B because she acquired the apartment complex for resale.
Objective: 1
7
41) Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000
plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the
new parcel. Due to the exchange, Landry will recognize
A) $10,000 gain.
B) $5,000 gain.
C) $5,000 loss.
D) $0.
Answer: D
Explanation: D) A loss is realized on the exchange ($45,000 amount realized less $50,000 adjusted basis).
The receipt of boot results in gain recognition only when gain has been realized on the transaction. There
is no recognition in the case of loss.
Page Ref.: I:12-6
Objective: 1
42) Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business
equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?
A) $0
B) $20,000
C) $40,000
D) $60,000
Answer: C
Explanation: C) Amount Realized ($40,000 + $140,000) - Adjusted Basis ($120,000) = $60,000 gain realized.
Gain is recognized to the extent of boot received$40,000.
Objective: 1
43) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business
equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?
A) $0
B) $4,000
C) $6,000
D) $10,000
Answer: C
Explanation: C) Amount Realized ($10,000 + $96,000) - Adjusted Basis ($100,000) = $6,000 gain realized.
Gain recognized to the lesser of realized gain ($6,000) or boot received ($10,000).
Objective: 1
8
44) Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV
and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle
is for personal use. What is the amount of recognized gain?
A) $0
B) $10,000
C) $20,000
D) $30,000
Answer: B
Explanation: B) The realized gain is $30,000 [($80,000 + $10,000) amount realized - $60,000 adjusted
basis]. Gain is recognized to the extent of the lesser of gain realized or boot receivedthe motorcycle
($10,000) is non-like-kind property and is considered boot.
Objective: 1
45) Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela).
Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of
the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by
Pamela. Pamela must recognize a gain of
A) $ 0.
B) $ 40,000.
C) $ 120,000.
D) $ 140,000.
Answer: A
Explanation: A) Like-kind property was exchanged. Pamela received no boot so none of the gain is
recognized.
Page Ref.: I:12-7
Objective: 1
46) Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges the
warehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis
$240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob
receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the
exchange of
A) $80,000.
B) $120,000.
C) $190,000.
D) $200,000.
Answer: D
Explanation: D)
Property received:
Land (FMV)
$320,000
Cash
40,000
Debt assumed by Rebecca
80,000
Total
$440,000
Minus: Basis of warehouse given up:
(240,000)
Gain realized
$200,000
Objective: 1
9
47) Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She
exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is
worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by
Emily on the exchange is
A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.
Answer: A
Explanation: A)
FMV of warehouse received
$420,000
Minus: Basis given up:
Land
(260,000)
Cash
( 40,000)
Debt assumed
( 80,000)
Gain realized by Emily
$ 40,000
Objective: 1
48) Glen owns a building that is used in business. The building is worth $200,000, but is subject to a
mortgage of $40,000. Glen's basis in the building is $120,000. Glen exchanges the building for investment
land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be
held for investment. Glen must recognize a gain of
A) $0.
B) $10,000.
C) $50,000.
D) $80,000.
Answer: C
Explanation: C)
Property received:
Land (FMV)
$150,000
Cash
10,000
Debt assumed by other party
40,000
Total
$200,000
Minus: Basis of building given up:
(120,000)
Gain realized
$80,000
Gain recognizedLesser of:
Boot received = cash + debt relief = $50,000, or
$50,000
Realized gain of $80,000
Objective: 1
10
49) Kai owns an apartment building held for investment purposes. The apartment building is worth
$500,000, although it is subject to a mortgage of $100,000. Kai's basis in the apartment building is
$380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of
$350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party
assumes the apartment building mortgage. What is Kai's recognized gain on this exchange?
A) $0
B) $50,000
C) $120,000
D) $150,000
Answer: C
Explanation: C)
Cash received
$ 50,000
Liability transferred
100,000
Office building received
350,000
Total consideration received
$500,000
Basis of apartment building
380,000
Gain realized
$120,000
Gain recognized equals the lesser of boot received or gain realized.
The total boot received is $150,000 (100,000 debt relief + 50,000 cash), so the gain recognized is $120,000.
Objective: 1
50) In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of
$10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri's
basis in the new truck?
A) $5,000
B) $8,500
C) $13,500
D) $15,000
Answer: C
Explanation: C) Gain realized is $1,500 [$15,000 amount realized less ($8,500 + $5,000) adjusted basis of
property given]. No boot was received, so no gain is recognized. Basis is $15,000 FMV of new truck less
$1,500 unrecognized gain = $13,500. Or, an alternative way to calculate the basis in the truck is to total the
adjusted basis of property exchanged ($8,500 truck plus $5,000 cash paid) or $13,500.
Page Ref.: I:12-7
Objective: 1
11
51) Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has
a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie's basis in the new equipment is
A) $130,000.
B) $140,000.
C) $160,000.
D) $170,000.
Answer: B
Explanation: B) The gain realized is $170,000 (FMV of new equipment plus $30,000 cash) - $160,000
adjusted basis of old equipment = $10,000. She must recognize gain to the extent of the lesser of the boot
received or the realized gain so the full $10,000 realized gain is recognized. The basis of the new
equipment is [$160,000 (old basis) - 30,000 (boot received) + 10,000 (gain recognized)] = $140,000 or the
FMV of property received less unrecognized gain of $0 = $140,000.
Page Ref.: I:12-7
Objective: 1
52) Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis
$120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land
valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the
warehouse. Jason's basis in the land received will be
A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.
Answer: A
Explanation: A) Gain realized is $80,000 [($150,000 + $40,000 + $10,000) amount realized less $120,000
adjusted basis]. Gain is recognized to the extent of boot received$40,000 + $10,000 = $50,000. The basis
of the land is $120,000:
(1) FMV of property received ($150,000) less unrecognized gain ($30,000), or
(2) $120,000 basis of property exchanged - $50,000 boot received + $50,000 gain recognized.
Page Ref.: I:12-7
Objective: 1
12
53) Laurie owns land held for investment. The land's FMV is $150,000. Laurie's basis in the land is
$130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The
warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey's
basis in the warehouse is $120,000. Laurie's basis in the warehouse received will be
A) $150,000.
B) $170,000.
C) $190,000.
D) $210,000.
Answer: C
Explanation: C)
Basis of property exchanged:
Land
$130,000
Cash
20,000
Debt
40,000
Basis of warehouse received:
$190,000
Or FMV of property received ($210,000) less unrecognized gain ($20,000)
Page Ref.: I:12-7
Objective: 1
54) Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment
with a $100,000 FMV and $20,000 of marketable securities. What is Rosa's basis for the new equipment?
A) $60,000
B) $80,000
C) $100,000
D) $120,000
Answer: A
Explanation: A) $60,000 basis of property exchanged - $20,000 boot received + $20,000 gain recognized =
$60,000
Objective: 1
55) If there is a like-kind exchange of property between related parties, how long do they have to wait to
dispose of the property received in order to avoid having to recognize any gain on the exchange?
A) 6 months
B) 1 year
C) 2 years
D) no waiting period
Answer: C
Explanation: C) Exchanges of property between related parties are not like-kind exchanges under current
law if either party disposes of the property within two years of the exchange.
Page Ref.: I:12-8
Objective: 1
13
56) Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also
provided stock worth $25,000. Rolf's adjusted basis in the building and stock is $130,000 and $11,000,
respectively. How much gain will Rolf recognize on the exchange?
A) $0
B) $14,000
C) $20,000
D) $34,000
Answer: B
Explanation: B) The stock exchanged by Rolf is not qualifying like-kind property so its gain must be
recognized in the normal manner.
Objective: 1
57) Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also
provided
stock worth $25,000. Yael's adjusted basis in the building and stock is $180,000 and $11,000, respectively.
How much gain or loss will Yael recognize on the exchange?
A) $0
B) ($30,000)
C) ($16,000)
D) $14,000
Answer: D
Explanation: D) As part of the exchange, Yael exchanged non-like-kind property (the stock). He will
recognized the gain on the stock, but cannot recognize the loss realized on the like-kind property.
Objective: 1
58) Which of the following statements is not true with regard to like-kind exchanges?
A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
B) The holding period of like-kind property received includes the holding period of the property
exchanged.
C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a
personal use car) in an otherwise like-kind exchange.
D) The basis of property received in an exchange is equal to the basis of the property exchanged less the
boot received plus the gain recognized and less any loss recognized.
Answer: C
Explanation: C) While gain or loss equal to the difference between the FMV and the adjusted basis of the
non-like-kind property surrendered must ordinarily be recognized, if non-like-kind property is a personal
use asset, the loss is not recognized.
Page Ref.: I:12-10; Topic Review I:12-1
Objective: 1
14
59) All of the following are true except:

A) A nonsimultaneous exchange may never qualify as a like-kind exchange.
B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an
otherwise like-kind exchange.
D) The holding period of like-kind property received includes the holding period of the property
exchanged.
Answer: A
Explanation: A) A nonsimultaneous exchange can qualify as like-kind exchange if the transactions are
interdependent.
Page Ref.: I:12-10; Topic Review I:12-1
Objective: 1
60) Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the
painting on September 5, 2014, for a Picasso sculpture and marketable securities to be held as an
investment. On what date does the sculpture's holding period begin?
A) June 1, 2008
B) June 2, 2008
C) September 5, 2014
D) September 6, 2014
Answer: A
Explanation: A) It is a qualifying like-kind exchange so the holding period carries over to the qualifying
replacement property.
Page Ref.: I:12-9 and I:12-10; Example I:12-31
Objective: 1
61) Juan's business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of
depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due
to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain
recognition?
A) $40,000
B) $32,000
C) $10,000
D) $22,000
Answer: B
Explanation: B) The taxpayer must replace the property with qualifying replacement property at a cost
equal to or greater than the amount realized.
Page Ref.: I:12-10
Objective: 2
15
62) Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted
basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was
reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another
business building. If the proper election is made, Stephanie will recognize gain of
A) $ 0.
B) $15,000.
C) $20,000.
D) $25,000.
Answer: C
Explanation: C)
Insurance proceeds
$200,000
Minus: Adjusted basis of old building
( 175,000)
Equals: Gain realized
$ 25,000
Insurance proceeds
$200,000
Minus: Proceeds reinvested
( 180,000)
Equals: Proceeds not reinvested
$ 20,000
Gain recognized:
Lesser of: 1. Gain realized
$ 25,000
2. Proceeds not reinvested
20,000
Gain recognized
$ 20,000
Objective: 2
16
63) Stephanie's building, which was used in her business, was destroyed in a fire. Stephanie's adjusted
basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was
reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another
business building. Assuming the proper election is made to defer gain, Stephanie's basis in the new
building will be
A) $175,000.
B) $180,000.
C) $200,000.
D) $210,000.
Answer: A
Explanation: A)
Insurance proceeds
$200,000
( 175,000)
$ 25,000
Insurance proceeds
$200,000
( 180,000)
$ 20,000
Gain recognized:
$ 25,000
20,000
Gain recognized
$ 20,000
Cost of new building
$180,000
Less deferred gain ($25,000 - 20,000)
-5,000
Basis of replacement building
$175,000
Objective: 2
17
64) Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the
building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed
$300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building.
Ron will recognize gain of
A) $0.
B) $30,000.
C) $60,000.
D) $90,000.
Answer: C
Explanation: C)
Insurance proceeds
$300,000
( 210,000)
$ 90,000
Insurance proceeds
$300,000
( 240,000)
$ 60,000
Gain recognized:
$ 90,000
60,000
Gain recognized
$ 60,000
Objective: 2
18
65) Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the
building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed
$300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building.
Ron's basis in the new building is
A) $180,000.
B) $210,000.
C) $240,000.
D) $330,000.
Answer: B
Explanation: B)
Insurance proceeds
$300,000
( 210,000)
$ 90,000
Insurance proceeds
$300,000
( 240,000)
$ 60,000
Gain recognized:
$ 90,000
60,000
Gain recognized
$ 60,000
Minus: Deferred gain ($90,000 gain realized
minus $60,000 gain recognized)
Basis of new building
$240,000
( 30,000)
$ 210,000

Objective: 2
66) Which of the following statements is false regarding involuntary conversions?

A) A taxpayer must replace the destroyed property within the same tax year in which the gain is realized.
B) A taxpayer cannot elect to defer recognition of a loss resulting from an involuntary conversion.
C) If deferral of gain is elected, the holding period of the converted property carries over to the
replacement property.
D) Gain may be deferred if the property is involuntarily converted into property that is similar or related
in service or use to the converted property.
Answer: A
Explanation: A) The replacement period extends to the end of the second tax year following the tax year
in which gain is realized.
Page Ref.: I:12-11 through I:12-15; Topic Review I:12-2
Objective: 2
19
67) The building used in Tim's business was condemned by the city of Lafayette. Tim received a
condemnation award of $125,000. He paid $1,200 in lawyer's fees and $800 for an appraisal of the
property. Tim's adjusted basis in the building was $60,000. Tim reinvests in similar property costing
$110,000, and Tim makes the proper election regarding the property. What is the amount of Tim's realized
(not recognized) gain on the condemnation?
A) $ 0
B) $50,000
C) $63,000
D) $65,000
Answer: C
Explanation: C)
Condemnation award
$125,000
Minus: Attorney's fees and appraisal fee
- 2,000
Amount realized
$123,000
( 60,000)
$ 63,000
Objective: 2
68) The building used in Terry's business was condemned by the city of St. Louis. Terry received a
condemnation award of $125,000. He paid $1,200 in lawyer's fees and $800 for an appraisal of the
property. Terry's adjusted basis in the building was $60,000. Terry reinvests in similar property costing
$110,000, and Terry makes the proper election regarding the property. What is the amount of Terry's
recognized gain on the condemnation?
A) $15,000
B) $13,000
C) $50,000
D) $63,000
Answer: B
Explanation: B)
Condemnation award
$125,000
Minus: Attorney's fees and appraisal fee
- 2,000
Amount realized
$123,000
( 60,000)
$ 63,000
Amount realized
Gain recognized:
Gain recognized
$123,000
(110,000)
$ 13,000
$ 63,000
13,000
$ 13,000

Objective: 2
20
69) Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a
tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for
$550,000. What is the amount of gain recognized on the transaction?
A) $0
B) $50,000
C) $350,000
D) $400,000
Answer: D
Explanation: D) The gain realized is $400,000 ($1,000,000 - $600,000). The amount realized from the
involuntary conversion exceeds the cost of replacement property by $450,000 ($1,000,000 - $550,000 =
$450,000). Therefore, the entire $400,000 realized gain is recognized.
Objective: 2
70) The building used in Manuel's business was condemned by the city of Mobile. Manuel received a
condemnation award of $220,000. He paid $800 in lawyer's fees and $600 for an appraisal of the property.
Manuel's adjusted basis in the building was $120,000. Manuel reinvests in similar property costing
$200,000, and Manuel makes the proper election regarding the property. Manuel's basis in the new
building is
A) $102,400.
B) $121,400.
C) $120,000.
D) $200,000.
Answer: B
Explanation: B)
$200,000
Minus: Deferred gain (Gain realized = $220,000
- $120,000 - $800 - $600 = $98,600; $98,600
realized minus $20,000 gain recognized)
( 78,600)
$ 121,400
Objective: 2
71) Which of the following statements regarding involuntary conversions is incorrect?

A) With some exceptions, the replacement property must be similar or related in service or use to the
property converted.
B) The functional-use test is more restrictive than the like-kind test.
C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.
D) Real property used in a trade or business that is condemned must be replaced with property which
has the same functional use as the converted property.
Answer: D
Explanation: D) Condemned real property may be replaced with like-kind property.
Objective: 2
21
72) Each of the following is true of deferral of gain attributable to the involuntary conversion of personal
property with the exception of
A) gain deferral is elective, except for direct conversions.
B) the replacement property may be acquired by gift, inheritance, or purchase.
C) qualifying replacement property must be acquired within a specified time period.
D) replacement property must be similar or related in service or use to the converted property.
Answer: B
Explanation: B) The general rule is that the taxpayer must purchase replacement property.
Page Ref.: I:12-13 through I:12-15; Topic Review I:12-2
Objective: 2
73) Alex owns an office building which the state condemns on January 15, 2014. Alex receives the
condemnation award on April 1, 2014. In order to qualify for nonrecognition of gain on this involuntary
conversion, what is the last date for Alex to acquire qualified replacement property?
A) January 15, 2016
B) January 15, 2017
C) December 31, 2016
D) December 31, 2017
Answer: D
Explanation: D) If real property used in a business is condemned, the replacement period ends three
years after the close of the first tax year in which any part of the gain is realized.
Objective: 2
74) According to Sec. 121, individuals who sell or exchange their personal residence may exclude part or
all of the gain if the house was owned and occupied as a principal residence for
A) at least five years immediately before the sale date.
B) at least one year of the three-year period before the sale date.
C) at least two years of the five-year period before the sale date.
D) at least five years of the ten-year period before the sale date.
Answer: C
Explanation: C) The residence had to be owned and occupied as a principal residence for at least two
years in a five year period before the sale or exchange.
Page Ref.: I:12-16
Objective: 3
22
75) Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie. Sophie
pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and
$1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is
$125,000. What is the amount of gain recognized on the sale?
A) $0
B) $100,000
C) $165,000
D) $170,000
Answer: A
Explanation: A) Their realized gain of $165,000 is not recognized because they meet the requirements of
Section 121.
Amount realized ($225,000 + $70,000 - $4,000 - $1,000)
Adjusted basis
Gain realized
$290,000
125,000
$165,000

Objective: 3
76) Bob and Elizabeth, both 55 years old and married, sell their personal residence to Wolfgang. Wolfgang
pays $660,000 and assumes their $90,000 mortgage. To make the sale they pay $20,000 in commissions and
$10,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is
$200,000. What is the amount of gain recognized on the sale?
A) $0
B) $20,000
C) $50,000
D) $520,000
Answer: B
Explanation: B)
Amount realized ($660,000 + $90,000 - $20,000 - $10,000)
$720,000
Basis
( 200,000)
Realized Gain
$520,000
Maximum amount to be excluded
500,000
Recognized Gain
$ 20,000
Objective: 3
23
77) Frank, a single person age 52, sold his home this year. He had lived in the house for 10 years.
He signed a contract on March 4 to sell his home and closed the sale on May 3.
Sales price
Selling expenses
Replaced and paid for a broken window on March 2
Basis of old home before repairs and improvements
$202,000
12,000
200
150,000
Based on these facts, what is the amount of his recognized gain?

A) $0
B) $39,800
C) $40,000
D) $52,000
Answer: A
Explanation: A) He meets the requirements under Sec. 121.
Sales proceeds
Minus: Selling expenses
Amount realized
Minus: Basis of old home
Gain realized
Section 121 exclusion
Gain recognized
$202,000
( 12,000)
$190,000
( 150,000)
$ 40,000
40,000
$
0

Objective: 3
24
78) Pierce, a single person age 60, sold his home this year. He had lived in the house for 10 years. He
signed a contract on March 4 to sell his home.
Sales price
Selling expenses
Replaced and paid for a broken window on March 2
Basis of old home before repairs and improvements
$600,000
15,000
800
310,000
Based on these facts, what is the amount of his recognized gain?

A) $0
B) $25,000
C) $40,000
D) $275,000
Answer: B
Explanation: B) He meets the requirements under Sec. 121.
Sales proceeds
Minus: Selling expenses
Amount realized
Gain realized
Gain recognized
$600,000
( 15,000)
$585,000
(310,000)
$275,000
250,000
$ 25,000

Objective: 3
79) On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were
$20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paid
for two weeks prior to the sale of her home. Ingrid's basis in her old home was $180,000. Ingrid's realized
gain upon the sale of her first home is
A) $ 0.
B) $40,000.
C) $50,000.
D) $70,000.
Answer: C
Explanation: C)
Sales proceeds
$250,000
Minus: Commissions
( 20,000)
Amount realized
$230,000
( 180,000)
Gain realized
$ 50,000
Objective: 3
25
80) William and Kate married in 2014 and purchased a new home together. Each had owned and lived in
separate residences for the past 5 years. William's adjusted basis in his old residence was $200,000; Kate's
adjusted basis in her old residence was $120,000. In late 2014, William sells his residence for $500,000
while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in
2014?
A) $0
B) $250,000
C) $320,000
D) $370,000
Answer: C
Explanation: C) William:
Amount realized
$500,000
Basis
(200,000)
Realized Gain
300,000
250,000
Recognized Gain
$ 50,000
Kate:
Amount realized
Basis
Realized Gain
Recognized Gain
$190,000
(120,000)
$ 70,000
70,000
$
0

Objective: 3
81) All of the following statements are true with regard to personal residences except:
A) Temporarily renting property that was formerly the taxpayer's principal residence does not
automatically preclude the use of Sec. 121.
B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer's
principal residence or a secondary residence.
C) In the case of married taxpayers, an individual may claim the exclusion even if the individual's spouse
used the exclusion within the past two years.
D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.
Answer: B
Explanation: B) Only the principal residence qualifies for the exclusion.
Objective: 3
26
82) Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only
one sale or exchange every
A) six months.
B) year.
C) two years.
D) five years.
Answer: C
Explanation: C) The full exclusion provided by Sec. 121 applies to only one sale or exchange every two
years.
Page Ref.: I:12-18
Objective: 3
83) Jenna, who is single, sold her principal residence on December 1, 2013, and excluded the $150,000 gain
because she met the ownership and usage requirements under Sec. 121. Jenna purchased another
residence in Pensacola on January 1, 2014 that she occupied until July 1, 2014 when she receives a new job
offer from an employer in Miami. She sells the Pensacola residence on October 1, 2014 and realizes a gain
of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2014?
A) $0
B) $10,000
C) $20,000
D) $40,000
Answer: A
Explanation: A) Since she has not met the two-year ownership and usage requirement on the Pensacola
house the exclusion must be prorated. Months of usage in the Pensacola house are 6 months. The
exclusion is 6/24, or 1/4 of $250,000 ($62,500). Therefore, none of the gain is taxable.
Objective: 3
84) Which of the following statements is false with regard to the ownership and use tests under Sec. 121?
A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be
excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
C) For purposes of the two-year ownership rule, a taxpayer's period of ownership includes the period
during which the taxpayer's deceased spouse owned the residence.
D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the
taxpayer's period of owning the property includes the time the residence was owned by the spouse or exspouse.
Answer: A
Explanation: A) The property does not have to be one's principal residence at time of the sale to qualify
for the exclusion.
Page Ref.: I:12-18
Objective: 3
27
85) Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use
and ownership tests are satisfied?
A) change in employment that meets the requirement for a moving expense deduction
B) increased traffic due to widening of a road
C) birth of one child
D) divorce
Answer: A
Explanation: A) Of the responses provided, only the change in employment requiring a move would
allow a partial exclusion.
Page Ref.: I:12-19
Objective: 3
86) Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion
of a gain on the sale of a home?
A) loss of employment by the qualified individual if the individual is eligible for unemployment
compensation
B) natural or man-made disaster resulting in a casualty to the residence
C) birth of one child
D) divorce or legal separation
Answer: C
Explanation: C) Under the regulations, multiple, but not single, births are considered to qualify as
unforeseen circumstances.
Page Ref.: I:12-19
Objective: 3
87) Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions.
Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?
A) Expected higher tax rates in the future.
B) Less accelerated depreciation provisions expected in the future.
C) A decline in the value of the asset being disposed of.
D) None of the above.
Answer: C
Explanation: C) A decline in the value of an asset indicates a loss will be realized. Taxpayers will
generally want to avoid like-kind treatment in order to recognize the loss.
Page Ref.: I:12-20
Objective: 4
28
88) Which of the following statements in not correct regarding the compliance requirements of an
involuntary conversion?
A) The taxpayer elects the deferral by not reporting the gain as income for the first year in which the gain
is realized although all relevant information regarding the vent will be reported.
B) A taxpayer who recognized the full gain and paid the taxes can later file a refund claim to elect the
deferral if qualified property is acquired before the expiration of the replacement period.
C) A taxpayer elects to defer the full gain in the year the gain is realized (year one), and no gain is
reported on that year's tax return. Qualified replacement property is acquired in the following year (year
two), but the full insurance proceeds are not spent so some gain must be recognized. The partial gain
recognition will be reported on the tax return for year two.
D) A taxpayer properly elected to defer the full realized gain in year one and provides appropriate
information on the replacement property. The taxpayer cannot later revoke the election and designate a
different property as the replacement property.
Answer: C
Explanation: C) An amended return is required if the cost of the replacement property is less than
expected at the time of the election.
Page Ref.: I:12-23
Objective: 5
89) Indicate with a "yes" or a "no" which of the following are like-kind exchanges.
a. Computer used in trade or business for office furniture used in trade or business.
b. Apartment building held as an investment for an office building used in trade or business.
c. Land used in trade or business for equipment used in trade or business.
d. Printer used in trade or business for printer used for personal purposes.
e. Exchange of improved real estate held for investment for unimproved real estate held for investment.
Answer:
a. No; b. Yes; c. No; d. No; e. Yes
Objective: 1
90) Indicate with a "yes" or a "no" which of the following are like-kind exchanges (assume all assets are
held for business or investment purposes).
a. Exchange of common stock held as an investment for land held as an investment.
b. Exchange of farmland for an apartment building.
c. Exchange of office furniture used in trade or business for computer used in a trade or business
d. Exchange of unimproved real estate for improved real estate.
e. Exchange of automobile used in trade or business for office building used in trade or business
Answer:
a. No; b. Yes c. No; d. Yes; e. No
Objective: 1
29
91) Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair
market value to be used in business.
a. What is the amount of gain or loss realized by Amelia?
b. What is the amount of gain or loss recognized by Amelia?
Answer:
a. $560,000 - $350,000 = $210,000 gain realized
b. All $210,000 gain realized is also recognized as the property does not qualify as like kind.
Objective: 1
92) Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of
$60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair
market value.
a. If Cheryl and John exchange their stock, what is the amount of Cheryl's realized gain?
b. If Cheryl and John exchange their stock, what is the amount of Cheryl's recognized gain?
Answer:
a. $75,000 - $60,000 = $15,000 realized gain.
b. All $15,000 of the gain is recognized because the exchange is neither a like-kind exchange nor an
exchange of stock for stock of the same corporation.
Objective: 1
93) Kevin exchanges an office building used in his business for another office building worth $200,000
plus $30,000 cash. The FMV of Kevin's old building is $280,000 (basis $150,000) and it is subject to a
mortgage of $50,000. The mortgage is assumed by the other party.
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?
Answer:
a. Property received:
Office building (FMV)
$200,000
Cash
30,000
Debt assumed by other party
50,000
Total
$280,000
Minus: Basis of office building given up:
(150,000)
Gain realized
$130,000
b.
Gain recognized to the extent of boot received$30,000 cash + $50,000 debt assumed = $80,000.
c. $150,000 determined as follows:

(1) FMV of property received ($200,000) less unrecognized gain ($50,000), or
(2)$150,000 basis of property exchanged - $80,000 boot received + $80,000 gain recognized.
Page Ref.: I:12-7; Examples I:12-21 and I:12-23
Objective: 1
30
94) Summer exchanges an office building used in her business for another office building. Summer's office
building has a FMV of $250,000 (basis of $180,000). The FMV of the new building is $300,000, and it is
subject to a mortgage of $60,000, which is assumed by Summer. Summer also pays the other party $40,000
cash.
a. What is the amount of gain realized by Summer?
b. What is the amount of gain recognized by Summer?
c. What is the basis of the new building to Summer?
Answer:
a. FMV office building received
$300,000
Minus: Basis given up:
Office building
(180,000)
Cash
( 40,000)
Debt assumed
( 60,000)
Gain realized by Summer
$ 20,000
b.
Summer recognizes no gain since this is a nontaxable exchange and she received no boot.
c.
Basis of property received:

Office building exchanged
Cash paid
Debt assumed
Basis of office building received:
$180,000
40,000
60,000
$280,000
Or FMV of property received ($300,000) less unrecognized gain ($20,000).

Page Ref.: I:12-7; Examples I:12-22 and I:12-23
Objective: 1
95) Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000
cash and a trotter (another racehorse) with a $150,000 fair market value.
a. What is the amount of gain realized by Trent?
b. What is the amount of gain recognized by Trent?
c. What is the adjusted basis of the trotter?
Answer:
a. The gain realized is $110,000 [($150,000 + 40,000) - $80,000].
b. The amount of gain recognized is $40,000, the amount of boot received.
c. The basis for the replacement property is $80,000 ($80,000 basis of property exchanged - $40,000 boot
received + $40,000 gain recognized) or $80,000 ($150,000 FMV of property received less $70,000 gain not
recognized).
Objective: 1
31
96) Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office
equipment with a fair market value of $12,000.
a. What is the gain or loss realized?
b. What is the gain or loss recognized?
c. What is the adjusted basis of the new office equipment?
Answer:
a. There is a realized loss of $3,000 [($5,000 + $12,000) amount realized less $20,000 adjusted basis].
b. There is no loss recognized as it is a like-kind exchange. The loss is not recognized as the receipt of
boot does not cause loss to be recognized.
c. The basis of the new equipment is $20,000 basis of property exchanged less $5,000 boot received or
$15,000. Alternatively, the basis can be determined as FMV of the new property ($12,000) plus deferred
loss ($3,000) or $15,000.
Page Ref.: I:12-7; Example I:1:2-24
Objective: 1
97) Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000
fair market value. In addition, he receives $20,000 of marketable securities.
a. What is the amount of gain realized by Eric?
b. What is the amount of gain recognized by Eric?
c. What is Eric's basis in the new printing press?
d. What is Eric's basis in the marketable securities?
Answer:
a. The realized gain is $56,000 [($100,000 + $20,000) - $64,000].
b. $20,000. The recognized gain is the lesser of the boot ($20,000) or the realized gain ($56,000).
c. The basis for the printing press is $64,000 ($64,000 basis of property exchanged less $20,000 boot
received plus $20,000 gain recognized).
d. The basis for the marketable securities is the FMV of $20,000.
Objective: 1
98) Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger
parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV
of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.
a. What is the amount of gain realized and recognized by Olivia on each asset?
b. What is the amount of Olivia's basis in the new land?
Answer:
a.
Land (L-K asset)
Securities (boot)
Amount realized ($110,000 total)
$75,000
$35,000
Less adjusted basis
50,000
20,000
Realized gain
$25,000
$15,000
Recognized gain
$0
$15,000
No boot is received
b. Olivia's basis in the new land is: $85,000:
$50,000 basis of old land + $20,000 of marketable securities + 15,000 gain recognized, or
$110,000 FMV new land - $25,000 unrecognized gain
32
Objective: 1
99) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV.
Whitney's basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a
$10,000 FMV as part of the exchange.
a. What is the amount, if any, of gain or loss recognized on the transaction?
b. What is the basis of the undeveloped land?
Answer:
a.
Timberland (L-K asset) Tractor (boot)
$290,000
$10,000
Less adjusted basis
150,000
15,000
Realized gain (loss)
$140,000
($5,000)
Recognized gain (loss)
$0
($5,000)
No boot is received
The tractor is non-like-kind property. Therefore, Whitney will recognize the loss on the transfer of $5,000
($10,000 FMV - $15,000 basis).
b. Whitney's basis for the undeveloped land is $160,000:
$150,000 basis of timberland + $15,000 basis of tractor - $5,000 loss recognized, or
$300,000 FMV undeveloped land - $140,000 unrecognized gain.
Objective: 1
100) Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth
$850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for
$40,000.
a. What are Marinda's realized and recognized gains (losses) on the two assets exchanged?
b. What is Marinda's basis in the warehouse acquired?
Answer:
a.
Office (L-K asset) Securities (boot)
$800,000
$50,000
Less adjusted basis
820,000
40,000
Realized gain (loss)
($20,000)
$10,000
Recognized gain (loss)
$0
$10,000
Loss cannot be recognized on like-kind property.
b. Marinda's basis in the warehouse is: $870,000:
$820,000 basis of office + $40,000 of marketable securities + 10,000 gain recognized, or
$850,000 FMV warehouse + $20,000 unrecognized loss
Objective: 1
33
101) Luke's offshore drilling rig with a $700,000 adjusted basis is destroyed by a hurricane. He collects
$620,000 from the insurance company and purchases a new drilling rig for $600,000.
a. What are the tax consequences of these transactions?
b. What is the basis of the new rig?
Answer:
a. A taxpayer may not defer recognition of loss from an involuntary conversion. Therefore the $80,000
loss ($620,000 - $700,000) is recognized as a casualty loss.
b. The basis of the new rig is $600,000.
Objective: 2
102) An office building owned by Abby and used in her business was destroyed in a fire. Abby's adjusted
basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was
reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another
business building.
a. Assume Abby made the proper election with regard to the involuntary conversion. What is the
amount of gain to be recognized by Abby?
b. What is Abby's basis in the new building?
Answer:
a. Insurance proceeds
$160,000
( 145,000)
$ 15,000
Insurance proceeds
$160,000
( 150,000)
$ 10,000
Gain recognized:
Lesser of:
1. Gain realized
Gain recognized
b.
$ 15,000
10,000
$ 10,000

Minus: Deferred gain ($15,000 gain
realized minus $10,000 gain recognized)
$150,000
( 5,000)
$145,000

Objective: 2
34
103) Mick owns a racehorse with a $500,000 basis used for breeding purposes. The racehorse is killed in
an accident and Mick receives $750,000 from the insurance company. Mick purchases another racehorse
for $400,000.
a. What is the amount of Mick's realized gain?
b. What is the amount of Mick's recognized gain?
Answer:
a. Amount realized
$750,000
Less: Adjusted basis
500,000
Gain realized
$250,000
b.
Amount realized from the involuntary conversion

Investment in new property
Amount in excess of reinvestment
$750,000
400,000
$350,000
Gain recognized is $250,000 because the realized gain is less than the unreinvested proceeds.

Objective: 2
104) Theresa owns a yacht that is held for personal use and has a $100,000 basis. The yacht is destroyed by
a storm and Theresa collects $120,000 from the insurance company. She purchases a new $150,000 yacht
for personal use and elects to defer any gain on the transaction. What is the basis of the new yacht?
Answer: Theresa's realized gain is $20,000 ($120,000 - $100,000). The deferred gain reduces the basis of
the new yacht. The new yacht's basis is $130,000 ($150,000 - $20,000).
Objective: 2
35
105) Kareem's office building is destroyed by fire on April 11, 2014. Settlement is reached with the
insurance company on November 1, 2014 when he receives a check for $900,000. The property had
recently been appraised for $920,000. Kareem's adjusted basis in the building was $800,000.
a. What is Kareem's realized gain or loss?
b. Assume Kareem wishes to defer the maximum amount of gain. Indicate:
(1) the minimum amount that must be spent on a new property.
(2) any restrictions on the new property in order for it to qualify.
(3) the deadline for placing the new property in service.
c. Assume that instead of a fire, the state forces Kareem to sell the property. Indicate how your
responses to part b would differ.
Answer:
a. Realized gain = $100,000 ($900,000 insurance proceeds less $800,000 adjusted basis).
b.
1. To avoid any gain recognition, Kareem must re-invest the full $900,00 proceeds in qualifying
property.
2. The replacement property must also be an office building.
3. The replacement deadline will be December 31, 2016.
c.
1. To avoid any gain recognition, Kareem must re-invest the full $900,00 proceeds in qualifying
property (same as in the case of a casualty).
2. The replacement property must satisfy the like-kind requirements so he must re-invest in real
property used for business or investment purposes, but not necessarily an office building..
3. The replacement deadline will be December 31, 2017.
Objective: 2
106) Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she
purchased ten years ago for $435,000.
a. What is the amount of Nicki's recognized gain on the sale?
b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki's recognized
gain on the sale?
c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in
the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?
Answer:
a. While Nicki's realized gain is $235,000 ($435,000 - $200,000), none of the gain is recognized since she
has owned and lived in the home for at least two of five years and, as a single person, she may exclude up
to $250,000 gain.
b. Nicki's realized gain is $285,000 ($485,000 - $200,000). She may exclude the first $250,000 of the gain.
The remaining $35,000 gain is recognized.
c. Nicki and Mike's realized gain is $285,000 ($485,000 - $200,000). A married filing jointly couple may
exclude up to $500,000 of the gain if they have owned and lived in the home for two of five years.
Page Ref.: I:12-16; Example I:12-49, I:12-50, and I:12-51
Objective: 3
36
107) In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the
house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the
provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a
former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed
central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs.
What is the adjusted basis of the home?
Answer:
The adjusted basis of the house is $205,000:
Purchase price
Closing costs ($5,000 + 3,000)
Deferred gain
Improvements ($15,000 + 12,000)
Adjusted basis
$200,000
8,000
-30,000
27,000
$205,000
Repairs do not affect the basis.

Objective: 3
108) James and Ellen Connors, who are both 50 years old and married, sell their personal residence on
July 25, 2014 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000.
They purchased a new home for $1,000,000 in August 2014. After living in that home for 219 days, the
Connors were forced to sell their new home in 2015 for $1,300,000 and move to another climate due to
Ellen's severe health problems.
a. What is the amount of gain recognized on the home sale in 2014?
b. What is the amount of the gain recognized on the home sale in 2015?
Answer:
a. Sales proceeds
$ 950,000
( 350,000)
Gain realized
$ 600,000
( 500,000)
Gain recognized
$ 100,000
b.
Sales proceeds
Gain realized
Gain recognized
$1,300,000
(1,000,000)
$ 300,000
( 150,000)
$ 150,000
Amount excludable: 219/730 = 30% (rounded) $500,000 = $150,000 excludable

Objective: 3
37
109) Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by
Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home
for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for
$790,000. What is the amount of Amber's recognized gain on the sale of the home?
Answer: Amber's realized gain is ($790,000 - $500,000) = $290,000. Because her period of ownership
includes the four years Jonathan owned the residence, she qualifies under Section 121. The first $250,000
of the gain is excluded; the remaining $40,000 is LTCG.
Objective: 3
110) The Smiths owned and used their principal residence, with an adjusted basis of $250,000, for ten
years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six
months later, they purchase another residence for $850,000.
a. What is the amount of gain the Smiths must recognize?
b. What is the basis of the new residence?
Answer:
a. Insurance proceeds
$800,000
( 250,000)
Gain realized
$550,000
( 500,000)
Remaining gain to be deferred
$ 50,000
No gain is currently recognized.
b.
Basis of new home is $850,000 less deferred gain $50,000 = $800,000.

Objective: 3
111) Discuss the basis rules of property received in a nontaxable like-kind exchange.
Answer: The basis of property received in a nontaxable exchange is equal to the adjusted basis of the
property given in exchange (including boot property given) increased by gain recognized and reduced by
any boot received or loss that is recognized on the exchange. An alternative approach is to start with the
FMV of the like-kind property received and either increase it by deferred loss or increase it by deferred
gain. The basis of non-like-kind property received is an amount equivalent to its FMV at the date of the
exchange.
Objective: 1
112) Discuss the rules regarding the holding period for like-kind property received in a nontaxable
exchange.
Answer: The holding period of like-kind property received in a nontaxable exchange includes the
holding period of the property exchanged. As a practical matter, the holding period of the property
exchanged carries over to the holding period of the like-kind property received. This carryover holding
period rule only applies if the like-kind property surrendered is a capital asset or an asset that is Sec. 1231
property.
Page Ref.: I:12-9
Objective: 1
38
113) May a taxpayer elect under Sec. 1033 to defer recognition of loss resulting from an involuntary
conversion?
Answer: Sec. 1033 does not apply to losses realized from an involuntary conversion. A taxpayer may not
elect to defer recognition of a loss resulting from an involuntary conversion.
Page Ref.: I:12-11
Objective: 2
114) Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They
are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home
costing approximately $600,000. What should they consider before selling their home?
Answer: Under Section 121, if Ike and Tina own and live in the home (their principal residence) for at
least two years (in a five year period), up to $500,000 of the gain on the sale will be excluded from income.
No reinvestment is required. It would also be necessary to know the reason that Ike and Tina are
considering the sale. If the sale is due to a change in employment, health reason, or unforeseen
circumstances, at least partial gain exclusion is available even though they have not lived in the residence
for the entire two years.
Objective: 3
115) Discuss why a taxpayer would want to avoid like-kind exchange provisions.
Answer: If the sale of the property results in a gain, a taxpayer may want to recognize the gain because
due to business operating losses or losses realized on other assets, there may be no taxes due on the gain
or a low level of tax. Recognition of the gain would increase the basis of the property received, thus
permitting higher depreciation if depreciation is allowable. In addition, the taxpayer should weigh
marginal tax rates today against anticipated marginal tax rates in the future, taking time value of money
into account.
If sale of the property would produce a loss, the taxpayer would likely want to sell in order to recognize
the loss. A loss realized on a non-taxable exchange is not recognized.
Objective: 4
39

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Chapter I12

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Prentice Hall's Federal Taxation 2015 Comprehensive, 28e (Pope)

Chapter I12 Property Transactions: Nontaxable Exchanges

3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an

4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

5) Real property exchanged for personal property qualifies as a like-kind exchange.

7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

38) All of the following qualify as a like-kind exchange except

59) All of the following are true except:

Page Ref.: I:12-10; Example I:12-32

66) Which of the following statements is false regarding involuntary conversions?

Page Ref.: I:12-12; Example I:12-37

71) Which of the following statements regarding involuntary conversions is incorrect?

Page Ref.: I:12-16; Example I:12-52

Based on these facts, what is the amount of his recognized gain?

Page Ref.: I:12-16 and I:12-17

Based on these facts, what is the amount of his recognized gain?

Page Ref.: I:12-16 and I:12-17

Page Ref.: I:12-17; Example I:12-54

c. $150,000 determined as follows:

Basis of property received:

Or FMV of property received ($300,000) less unrecognized gain ($20,000).

Cost of new building

Page Ref.: I:12-12; Example I:12-37

Amount realized from the involuntary conversion

Page Ref.: I:12-12; Example I:12-38

Repairs do not affect the basis.

Page Ref.: I:12-17; Example I:12-53

Amount excludable: 219/730 = 30% (rounded) $500,000 = $150,000 excludable

Basis of new home is $850,000 less deferred gain $50,000 = $800,000.

Page Ref.: I:12-21; Example I:12-66

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