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

Melody's adjusted basis for 10,000 shares of Cardinal, Inc. common stock is $1,000,000. During the year, she receives a 5% stock dividend that is a nontaxable stock dividend. a. Melody reports no gross income because the dividend is a nontaxable stock a. What is the amount of Melody's gross income? b. What is Melody's total basis for the stock? c. What is Melody's basis per share?

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?

Terry exchanges real estate (acquired on August 25, 2013) held for investment for other real estate to be held for investment on September 1, 2019. None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry's holding period for the new real estate begins on August 25, 2013.

Bria's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Bria receives insurance proceeds of $192,500 two months after the date of the loss. One month later, Bria uses the insurance proceeds to purchase a new office building for $275,000. Her adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Ed and Cheryl have been married for 27 years. They own land jointly with a basis of $300,000. Ed dies in 2019, when the fair market value of the land is $500,000. Under the joint ownership arrangement, the land passed to Cheryl. a. If Ed and Cheryl reside in a community property state, what is Cheryl's basis in the land? b. If Ed and Cheryl reside in a common law state, what is Cheryl's basis in the land?

Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.

During 2018, 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?

Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Wade is a salesman for a real estate development company. Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000. Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis - $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).

Pat owns a 1965 Ford Mustang that he uses for personal use. He purchased it four years ago for $22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000. Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?

Evelyn's office building is destroyed by fire on July 12, 2019. The adjusted basis is $315,000. She receives insurance proceeds of $350,000 on August 31, 2019. Calculate the amount that Evelyn must reinvest in qualifying property so that her recognized gain be $20,000. Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion) postponement treatment.

Kelly, who is single, sells her principal residence, which she has owned and occupied for eight years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.

Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.

On January 5, 2019, Warren 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, Warren 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, 2019, Warren purchases a new home for $600,000. On November 15, 2020, he pays $25,000 for completion of a new room on the house, and on January 14, 2021, he pays $15,000 for the construction of a pool. What is the Warren's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

Alice owns land with an adjusted basis of $305,000, subject to a mortgage of $175,000. On April 1, 2019, Alice sells her land subject to the mortgage for $325,000 in cash, a note for $300,000, and property with a fair market value of $60,000. What is Alice's amount realized on this sale?

The amount received for a utility easement on land is included in the gross income of the taxpayer.