Taxation of Property Transactions
Help Questions
CPA Regulation (REG) › Taxation of Property Transactions
A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?
$35,000
$110,000
$115,000
$190,000
Explanation
The taxpayer’s realized gain is $190,000 ($200,000 FMV of building + $35,000 cash + $75,000 mortgage relief - $120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the $110,000 of boot.
Veronica, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Veronica received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Veronica elected to recognize the minimum gain possible. What is Veronica’s basis in the new Warehouse?
$47,000
$139,000
$75,000
$167,000
Explanation
For an involuntary conversion, when a company reinvests insurance proceeds into an asset that would replace the property lost, the basis of the new property equals that of the adjusted basis of the lost property (here, $75,000). A gain would be recognized for the proceeds not invested, while there would be a deferred gain not yet recognized for the new asset’s cost above the basis of the lost property.
Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus $1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize?
$10,000
$0
$3,000
$11,000
Explanation
Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash + $2,000 debt relief - $70,000 basis in property exchanged). Total boot received is $3,000 ($1,000 cash + $2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the $3,000 of boot.
Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Clint: $25,000
Darren: $90,000
Ellen: $10,000
Clint: $0
Darren: $0
Ellen: $0
Clint: $0
Darren: $90,000
Ellen: $0
Clint: $25,000
Darren: $90,000
Ellen: $0
Explanation
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.
A corporate combination is tax-free to the if it is a qualifying reorganization.
Shareholder
Corporation
Both
Neither
Explanation
When a corporate reorganization is qualifying, it is tax-free to both all corporations involved and their shareholders.
The sale of which of the following types of business property should be reported as Section 1231 property?
Land held for 18 months
Inventory held for resale
Machinery held for 6 months
Cattle held for 6 months
Explanation
1231 assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.
Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus $1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize?
$10,000
$0
$3,000
$11,000
Explanation
Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash + $2,000 debt relief - $70,000 basis in property exchanged). Total boot received is $3,000 ($1,000 cash + $2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the $3,000 of boot.
Veronica, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Veronica received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Veronica elected to recognize the minimum gain possible. What is Veronica’s basis in the new Warehouse?
$47,000
$139,000
$75,000
$167,000
Explanation
For an involuntary conversion, when a company reinvests insurance proceeds into an asset that would replace the property lost, the basis of the new property equals that of the adjusted basis of the lost property (here, $75,000). A gain would be recognized for the proceeds not invested, while there would be a deferred gain not yet recognized for the new asset’s cost above the basis of the lost property.
Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Clint: $25,000
Darren: $90,000
Ellen: $10,000
Clint: $0
Darren: $0
Ellen: $0
Clint: $0
Darren: $90,000
Ellen: $0
Clint: $25,000
Darren: $90,000
Ellen: $0
Explanation
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.
The sale of which of the following types of business property should be reported as Section 1231 property?
Land held for 18 months
Inventory held for resale
Machinery held for 6 months
Cattle held for 6 months
Explanation
1231 assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.