Exam 9: Tax-Deferred Exchanges

Zoey contributed property with a tax basis of $25,000 and a fair market value of $60,000 to a newly formed partnership in exchange for a 40 percent interest. How much income must Zoey recognize as a result of the transaction?

For a nonsimultaneous exchange to qualify for like-kind provisions, the taxpayer must identify the property to be acquired within 90 days and actually close the transactions within 180 days.

Internal Revenue Code Section 351, relating to transfers to a controlled corporation, can apply to transfers to both a new and an existing corporation.

A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What is A's basis for his AB stock?

To defer gain recognition on an involuntary conversion, qualifying property must be obtained within a specified time period.

Boot received in a like-kind exchange never causes loss to be recognized.

James corporation exchanges a building (fair market value = $800,000, adjusted basis = $600,000) that has a $100,000 mortgage for another building owned by Pete Corporation (fair market value = $1,100,000, adjusted basis = $600,000) that is encumbered by a $400,000 mortgage. Each party assumed the mortgage on the building received. What are James's and Pete's recognized gains on the exchange, respectively?

A tax-deferred reorganization can involve all of the following except:

A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What are A's and B's recognized gains, respectively, on these transfers?

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share. Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000. In exchange, Benjamin receives 30 shares of stock and $5,000 cash. Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000. Andrew receives 30 shares of stock and $5,000 cash. Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000. Its current basis is $15,000 after recognition of $45,000 in depreciation expense. The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange. Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock. What is Emily's basis in the stock she received?

The holding period for property received in a qualifying like-kind exchange begins on the date the new property is received.

Billy Bob, who is single, owns a mountain estate in North Carolina with a basis of $900,000 that he used as his principal residence for the previous five years. On December 6, 2018 a major earthquake hit the area and the home was completely destroyed. Billy Bob received $1,450,000 from his insurance to rebuild or replace the home. Billy Bob decides to build a home in Charlotte near his brother. How much gain must he recognize if he (a) invests only $1,100,000 in the new home? (b) invests only $800,000 in the new home?

Juan owned a small rental property, which was condemned by the county to expand a local park. His adjusted basis in the property was $40,000 and he received a payment of $75,000 from the county. A year later he purchased a similar piece of real estate for $70,000. What is Juan's basis in the replacement property?

If a shareholder contributes property to a corporation, but receives nothing in exchange for the property, what are the tax consequences to the shareholder and the corporation?

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share. Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000. In exchange, Benjamin receives 30 shares of stock and $5,000 cash. Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000. Andrew receives 30 shares of stock and $5,000 cash. Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000. Its current basis is $15,000 after recognition of $45,000 in depreciation expense. The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange. Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock. What is the corporation's basis for the land it received from Benjamin?

Willow Corporation exchanged land valued at $250,000 (adjusted basis = $175,000) for a building owned by Tree Corporation valued at $350,000 (adjusted basis = $200,000) and $50,000 cash. In addition, Willow assumed the $150,000 mortgage on Tree's building. What are Willow's and Tree's recognized gain or loss, respectively?

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share. Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000. In exchange, Benjamin receives 30 shares of stock and $5,000 cash. Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000. Andrew receives 30 shares of stock and $5,000 cash. Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000. Its current basis is $15,000 after recognition of $45,000 in depreciation expense. The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange. Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock. What is Andrew's basis for the stock he receives?

Dylan, Luke, and Hannah form a partnership. Dylan contributes land with a fair market value of $25,000 (basis of $15,000) in exchange for a 25% interest. Luke contributes equipment with a $35,000 fair market value (basis of $38,000) in exchange for a 35% interest, and Hannah contributes a building with a $100,000 fair market value (basis = $35,000) and a mortgage of $60,000 (assumed by the partnership) in exchange for a 40% interest. What is the partnership's basis in the building it received from Hannah?

A taxpayer must transfer a minimum required amount of property, along with any services performed, to include the stock received in meeting the control requirement for a corporate formation.

Sebastian contributed property with a tax basis of $30,000 and a fair market value of $75,000 to a new partnership in exchange for a 50 percent interest. The property was encumbered by a $50,000 mortgage that the partnership assumed. The other partner contributed $25,000 cash. What is Sebastian's basis in his partnership interest?