CPA Regulation (REG) : CPA Regulation (REG)
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #2 : Like Kind Exchanges
In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
Convertible debentures
Partnership interests
Convertible preferred stock
Rental real estate located in different states
Rental real estate located in different states
To qualify for like-kind exchange treatment, both properties must be real property for business or investment. Only the rental real estate meets this criteria.
Example Question #3 : Like Kind Exchanges
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?
$3,000
$10,000
$0
$11,000
$3,000
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.
Example Question #1 : Taxation Of Property Transactions
In a like kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
Rental real estate located in different states
Convertible preferred stock
Partnership interests
Convertible debentures
Rental real estate located in different states
No taxable gain or loss will be recognized on a like kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like kind exchange.
Example Question #1 : Like Kind Exchanges
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?
Manufacturing equipment for factory building
Common stock for common stock
Partnership interest for partnership interest
Apartment building for unimproved land
Apartment building for unimproved land
Real property exchanged for other real property will be classified as a like kind exchange.
Example Question #2 : Like Kind Exchanges
If both assets in a like-kind exchange transaction are ________, no taxable gain or loss will be recognized.
Warrants
Interest in a legal entity
Convertible stock
Real estate property
Real estate property
Real estate qualifies as an asset for a like-kind exchange. Thus, no taxable gain or loss will be recognized.
Example Question #1 : Involuntary Conversions
Marshall purchased a computer for $1,500 and a stereo system for $1,300. The computer is used solely for business and the stereo solely for personal entertainment. During the same year, Marshall experienced serious financial difficulty and sold the stereo for $300 and the computer for $1,000. What amount, if any, is Marshall entitled to deduct as a loss relating to the sale of the stereo and computer?
$0
$1,500
$500
$1,000
$500
A taxpayer may only deduct losses relating to business-use assets. Since the stereo was used solely for personal entertainment, loss recognition is not allowed for tax purposes. Only the $500 loss on the sale of the computer ($1,500 purchase price less the $1,000 sale price) would be deductible.
Example Question #2 : Involuntary Conversions
Parallel Corporation’s building was destroyed as a result of a hurricane. The fair market value of the building at the time of the hurricane was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows ($400,000 for the building, $100,000 for lost profits during rebuilding). Parallel does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Parallel?
$0
$150,000
$100,000
$50,000
$150,000
In determining gains or losses from involuntary conversions, only the basis of the property involuntarily lost is considered in addition to the boot received. Here, since the adjusted basis was $350,000 and $400,000 of the insurance proceeds were for the building, Parallel would recognize a taxable gain of $50,000 (since they do not defer gains for involuntary conversions). The additional $100,000 for lost profits is also taxable, since it relates to profits the company would have otherwise earned in the tax year. The total taxable amount is $150,000 ($50,000 + $100,000).
Example Question #221 : Cpa Regulation (Reg)
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?
$75,000
$167,000
$47,000
$139,000
$75,000
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.
Example Question #4 : Involuntary Conversions
How should insurance deductibles and payouts be treated for proceeds on a warehouse destroyed by a fire?
None of the proceeds in excess of the adjusted basis of the warehouse before the fire should be taxed as a gain
The deductible should not be deducted from the payout and any proceeds in excess of the adjusted basis of the warehouse before the fire should be taxed as a gain
The deductible should be deducted from the payout and any proceeds in excess of the adjusted basis of the warehouse before the fire should be taxed as a gain
None of the above
The deductible should be deducted from the payout and any proceeds in excess of the adjusted basis of the warehouse before the fire should be taxed as a gain
Proceeds that cover the cost of the warehouse’s adjusted basis will not be taxed as a gain as the proceeds are for the destroyed asset.
Example Question #3 : Involuntary Conversions
A married couple abandoned their principal residence in March. They had purchased the home five years ago for $350,000. The home had a current FMV of $300,000. What is the maximum loss if any that they are allowed to deduct on the current year’s tax return for the abandoned property?
$300,000
$350,000
$0
$50,000
$0
No deduction is allowed for the loss on disposal of a personal use asset.
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