Exam 15: Property Transactions: Nontaxable Exchanges

What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?

Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.

On January 5, 2017, 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, 2017, Waldo purchases a new home for $600,000. On November 15, 2018, he pays $25,000 for completion of a new room on the house, and on January 14, 2019, 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?

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2017. If the insurance settlement was $950,000 (received March 1, 2018), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2018. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020. What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?

Katrina, age 58, rented (as a tenant) the house that was her principal residence from January 1, 2017 through December 31, 2018. She purchased the house on January 1, 2019, for $150,000 and continued to occupy it through June 30, 2020. She leased it to a tenant from July 1, 2020, through December 31, 2021. On January 1, 2021, she sells the house for $350,000. She incurs a realtor's commission of $20,000. Calculate her recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire another residence.

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

Patty's factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2017. Insurance proceeds of $500,000 are received on June 1, 2017. She has a new factory building constructed for $490,000, which she occupies on October 1, 2017. Assuming Patty's objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

If a taxpayer reinvests the net proceeds (amount received - related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain.

Edward, age 52, leased a house for one year in Memphis with an option to buy as his personal residence. At the end of the lease, he purchased the house. He lived there for an additional 26 months before his employer transferred him to Tucson. Expecting to be in Tucson for 18 to 24 months, he rented the Memphis house for 18 months with an option to extend on a month to month basis for an additional 6 months. At the end of the 18-month period, Edward's employer offered him a permanent position in Tucson as branch manager. The tenant who had been occupying Edward's house in Memphis purchased it at the end of the 24-month extended lease period. Is Edward eligible to elect exclusion treatment under § 121?

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

Define an involuntary conversion.

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?

Ramon sells land with an adjusted basis of $120,000 and a fair market value of $175,000 to Pauline, his wife, for $175,000. Discuss how the tax consequences would differ if Ramon and Pauline had never been married.

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.

In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied?

Pat owns a 1965 Ford Mustang which 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.

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