Tax Consequences - Answer Key

1. C

Realized Gain = [FMV of acquired building + Boot] less adjusted basis of building given up
Realized Gain = [$225,000 + $45,000] less $200,000
Realized Gain = $70,000

2.
C

Property transferred to a spouse in a like-kind exchange does not have to satisfy a two-year rule, if either spouse decides to dispose of the exchange property. However, Larry must satisfy the two-year rule for his exchange with his sister, or the exchange will be a taxable event.

3.
A

Recognized gain is the lesser value of the boot received or the realized gain. The boot received is $10,000 and the realized gain is $2,000, since $2,000 is the lesser of the two values. So, "A" is the correct answer. Realized gain is FMV of the new boat $20,000 + Boot $10,000 less adjusted basis of old the boat $28,000, which equals $2,000.

4.
D

Adjusted basis of the new boat = FMV of the new boat – [Realized gain minus recognized gain], therefore: New basis = $20,000 – [$2,000 - $2,000]. The new adjusted basis of the new boat is $20,000.

5.
B

This transaction does not qualify as a "like-kind" exchange because the property exchanged is unlike in nature according to the IRS requirements. Because it does not qualify, both Tom and Nate can sell the property at any time they wish and assume the tax consequences. Schedule B is used to report interest and dividends. Form 8824 is used for reporting "like-kind" exchanges.

6. D

(Adjusted basis is the purchase price $250,000 + improvements $30,000 – insurance claim $5,000) = $275,000, repairs do not add or take away from basis. Selling price $725,000
Less basis -275,000
Less exclusion -250,000
Gain $200,000

7.
C

Zack can take a $100,000 ordinary loss ($50,000 if single) and up to $3,000 capital loss for the first year. The remaining $22,000 loss is treated as a capital loss and can be carried forward into future tax years.

8.
B

Profit divided by sales price = gross profit percentage

$400,000 profit/$800,000 sales price = 50%

9.
A

No loss deduction is permitted as the transaction would be deemed as a wash-sale violation. A spouse cannot transact a buy of substantially identical securities within 30 days after the other spouse initiates a sale of the same security.

10.
D

Nancy's net long-term gain is $5,000, not $15,000. All other statements are correct.

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