CPA Regulation (REG) : Taxation of Property Transactions
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Example Questions
Example Question #4 : Like Kind Exchanges
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?
Apartment building for unimproved land
Common stock for common stock
Manufacturing equipment for factory building
Partnership interest for partnership interest
Apartment building for unimproved land
Real property exchanged for other real property will be classified as a like kind exchange.
Example Question #5 : Like Kind Exchanges
If both assets in a like-kind exchange transaction are ________, no taxable gain or loss will be recognized.
Convertible stock
Warrants
Interest in a legal entity
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?
$500
$0
$1,500
$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?
$100,000
$150,000
$50,000
$0
$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 #3 : Involuntary Conversions
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
$75,000
$139,000
$167,000
$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 above
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
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 #5 : 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?
$0
$50,000
$300,000
$350,000
$0
No deduction is allowed for the loss on disposal of a personal use asset.
Example Question #5 : Involuntary Conversions
_______ would not be included in the calculation of realized gain or loss by a taxpayer on the transaction between one piece of real estate for another.
Adjusted basis of the property given up
FMV of property given up
FMV of property received
Boot (if any) received
FMV of property given up
In calculating the gain or loss realized during a like-kind transaction, the FMV of property given up would not be relevant in the calculation.
Example Question #11 : Taxation Of Property Transactions
A taxpayer purchased a forklift for use in the taxpayer's business for $20,000 on January 1 of the current year. The taxpayer sold the forklift for $22,000 on June 1 of the current year. What is the taxpayer's Section 1231 gain as a result of the sale?
$0
$2,000
$6,000
$22,000
$0
To qualify for Section 1231 gains, the asset must be held for more than 12 months. Since the asset was purchased and sold in the same year, it is not eligible.
Example Question #12 : Taxation Of Property Transactions
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
Depreciation provides a greater deduction over the life of the asset.
Section 179 provides a greater deduction over the life of the asset because, subject to limitations, the cost of the asset is deductible in full.
There is no difference in the total amount that is deductible over the life of the asset.
The cost of the asset may be deducted under both Section 179 and as depreciation.
There is no difference in the total amount that is deductible over the life of the asset.
The Section 179 election allows a taxpayer to deduct the entire cost of an asset (up to certain dollar thresholds) in place of depreciating the asset over its useful life. Since it is an alternative to depreciation in terms of when the depreciation costs are recognized (not the amount recognized), there is no difference in the amount that would be deductible depreciation expense over the life of the asset.
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