Tax Consequences - Sample Questions 1 - 10

1. John traded a building with an adjusted basis of $200,000 and a FMV of $300,000 to Tim for a similar building. Tim paid $150,000 for his building, which is now worth $225,000. Tim also gave $25,000 cash and $20,000 worth of computer equipment in the exchange. What is John's realized gain on the like-kind exchange?

A) $50,000

2. Larry and Lisa (brother and sister), did a like-kind exchange of property. One year later, Larry disposes of the newly exchanged property. All of the following are true statements EXCEPT?

A) Larry will not receive a favorable tax-free treatment on the exchange.
If the disposition is due to Larry's death, the exchange will still be tax-free.
If Larry transferred the property to his spouse, the previous exchange stays tax-free.
Larry will have to compute a new adjusted basis on the new property.

3. Austin wants to do a like-kind exchange of his fishing charter boat for a smaller charter boat for his business. Austin received $10,000 in cash from the exchange. Additional facts about the exchange include the following:

The new boat has an adjusted basis of $17,000.

The new boat has a FMV of $20,000.

Austin's boat has an adjusted basis of $28,000.

Austin's boat has a FMV of $29,000.

What will be Austin's recognized gain in the new boat?

A) $2,000
D) $10,000

4. Using the same information on Austin's like-kind exchange in question #3 above, what will be Austin's adjusted (or substitute) basis in the new boat from the exchange?

A) $17,000

5. Nate exchanged a large business printing press with his Uncle Tom for a parcel of investment land. He also gave his Uncle $20,000 in cash to make the deal even. Which of the following is TRUE?

A) This transaction qualifies as a "like-kind" exchange.
Uncle Tom can sell the printing press in 18 months.
Nate must wait two years to sell the property to retain tax-free status.
D) Nate must file Form Schedule B to report the exchange.

6. Frank, a single tax filer, sold his primary residence this year for $725,000. He lived in the house for three out of the last five years, and this is his first home ever owned. He paid $250,000 for the house eight years ago and made capital improvements of $30,000 since that time. He also had repair bills of $10,000 and received $5,000 in insurance funds for a casualty loss. What is the gain he must report from the sale?

A) $0
D) $200,000

7. Zach Smith started Smith Construction, Inc. as a regular C Corporation several years ago, and issued Section 1244 stock to himself with a $125,000 investment. Zach is married and files a joint return. The business failed and now the stock is worthless. Which of the following is/are the correct tax deduction(s) for Zach for the stock in the year of the closing?

I. $50,000 Ordinary Loss
II. $100,000 Ordinary Loss
III. $3,000 Capital Loss
IV. $25,000 Capital Loss

A) I only
II only
II and III only
D) II and IV only

8. Henry Putnam sold a parcel of land for $800,000, and his cost basis in the land was $400,000. The sale was an installment sale with a down payment of $100,000, and a seven-year note for the remainder plus 8% interest. What is the gross profit percentage to use for gain computation?

A) 40%
B) 50%
C) 60%

9. On December 1, Edna sells 100 shares of XYZ stock in her personal account and realizes a $10,000 long-term loss on the sale. Earl (Edna's husband), buys 100 shares of XYZ stock on December 15 of the same year in his revocable trust. Earl then sells the shares in July of the following year. What is Edna's deductible tax-loss for the year of sale?

A) $0
B) $1,500
C) $3,000

10. Nancy just computed her year-end capital gains and losses from her brokerage account. She came up with the following figures:

Short-term losses: $24,000
Long-term losses: $10,000
Short-term gains: $5,000
Long-term gains: $15,000

Which of the following are TRUE statements?

I. She has a net short-term loss of $19,000.
II. She has net long-term gain of $15,000.
III. She has a carry forward short-term loss of $11,000.
IV. She can take a $3,000 capital loss on her tax return for this year, after net gains and losses are offset.

A) I and II only
I and III only
II, III and IV
I, III and IV
E) I, II, III and IV

Answer Key
Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  3. Professionals

    Career Advice: Financial Planner Vs. Wealth Manager

    Understand the differences between a career in financial planning and wealth management, and identify which is better for you based on your goals and talents.
  4. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  5. Mutual Funds & ETFs

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  6. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  7. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  8. Professionals

    The Best Schools for Financial Planning

    Among the best universities for financial planning are the University of Georgia, Boston University, The College of Financial Planning, Texas Tech, San Diego State, Baylor, Fairleigh Dickinson ...
  9. Investing Basics

    Hiring a Financial Advisor? Look for the CFP Label

    Don’t skimp on the CFP designation. Here's why those three letters show that someone is qualified in financial and investment planning.
  10. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  3. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  3. Do financial advisors work only in banks?

    While the majority of financial advisors work for financial institutions such as banks, a large proportion of them are self-employed ... Read Full Answer >>
  4. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!