Gains and Losses on Disposition of Property

Question 1

What is realization?

Answer 1

Te sale, disposition, or exchange of as asset

Question 2

What is recognition?

Answer 2

Reporting for tax purposes

Question 3

Unless a specific statutory or common law exception applies, whenever a gain is _____, it must also be ____ for tax purposes.

Answer 3

Realized

Recognized

Question 4

What is the formula to determine gain or loss?

Answer 4

Amount Realized less the Adjusted Basis

Question 5

Amount realized includes money received, PLUS the FMV of property or services received, PLUS ____ or _____ to which the property sold is subject or which the buyer assumes.

Answer 5

Mortgages or liabilities

Question 6

A owns a small property in NV with a cost basis on $700k. In order to cover legal bills, A puts the property up for sale. The buyer pays $600k in cash and assumed the mortgage of $500k. How much gain will A realized and recognized?

Answer 6

$400k.

Question 7

A TP’s basis in property acquired by purchase is generally the ____ of the property, including money paid and ______ incurred in connection with the purchase.

Answer 7

Cost

Borrowing.

Question 8

A purchases a new home, making a $500k down payment and taking out a mortgage on the property in the amount of $2.5m. What is his basis?

Answer 8

$3m

Question 9

A transfer of property between ex-spouses that is incident to divorce is/isn’t taxable.

Answer 9

Is not.

Question 10

An ex-spouse receiving property incident to a divorce has what basis?

Answer 10

The same as the other spouse.

Question 11

As part of a divorce, A agrees to transfer to B property purchased five years ago for $500k. Today, it is valued at $3m. Must A recognize any income? Must B recognize any income? What is B’s basis?

Answer 11

No

No

$500k

Question 12

When there is a gift of property, how is the donee’s basis determined?

Answer 12

The donee takes the donor’s basis.

Question 13

A purchases stock for $10k that now has a FMV of $100k. He gives the stock to his daughter, B. B sells it for $100k. What is B’s taxable gain on the stock?

Answer 13

$90k.

Question 14

When TP inherits property, what is the basis?

Answer 14

The FMV of the property at the date of the decedent’s death.

Question 15

A purchases stock for $10k that now has a FMV of $100k. He gives the stock as a bequest to his daughter, B. B sells it for $100k. What is B’s taxable gain on the stock?

Answer 15

$0

Question 16

What is the rule for gain and loss in “like kind” exchanges?

Answer 16

No gain or loss is recognized when a TP exchanges property held for productive use in a business or for investment of like-kind property also held for productive use in business or for investment.

Question 17

A owns apartment in Seattle, which he holds for investment purposes only. His basis is $100k and the FMV is $250k. He exchanges the apartment for a farm with $250k. What is his gain upon the exchange? How much must re recognize? What is his basis in the farm? Explain

Answer 17

Gain is $150.

No recognized gain. This is a like kind exchange

Basis in farm is $100k (carry-over basis)

Question 18

Is gain realized when property is involuntarily converted due to theft, fire, seizure, requisition, or condemnation and is converted into property that is “similar or related in service or use?”

Answer 18

No

Question 19

If the property lost or damaged is converted to money, gain or loss is not recognized if the TP purchases replacement property that is “similar or related in service or use” within ____ years from the date of the involuntary conversion. Gain or loss will be recognized, however, to the the extent that . . .

Answer 19

2

The money received exceeds the cost of the replacement property.

Question 20

A owns apartment in Seattle, which he holds for investment purposes only. His basis is $100k and the FMV is $250k. The apartment is destroyed and A gets $250k in insurance proceeds. A uses $200k of that money to acquire substitute rental property. How much gain? How much gan recognized?

Answer 20

$150k gain.

$50k gain recognized.

Question 21

Up to _____ (_____ for joint returns) of gain from sale of a principal residence can be excluded if the property has been used as the TP’s principal residence for periods aggregating ___ years during the five-year period ending on the date of the sale.

Answer 21

$250k

$500k

2 years

Question 22

A acquires a home in Y1 for $6m. He uses the home as a principal residence for 3 years. He sells the home in Y4 for $10m. Gain realized? Amount realized? Adjusted basis? Recognized gain? Explain

Answer 22

Realized gain = $4m

Amount realized = $10m

Adjusted basis = $6m

Recognized gain = $3.75 ($4m less the $250k exclusion)

Question 23

A acquires a home in Y1 for $6m. He uses the home as a principal residence for Y1 and sells the home in Y2 for $10m. Gain realized? Amount realized? Adjusted basis? Recognized gain? Explain

Answer 23

Realized gain = $4m

Amount realized = $10m

Adjusted basis = $6m

Recognized gain = $4m

Because A did not use the home as his principal place of residence for a period aggregating 2 years during a five-year period ending on the date of sale, he cannot claim the “Sale of a Principal Residence” exclusion of $250k.