Chapter 13 Property Transactions: Determination Of Gain Or Loss, Basis Considerations, And Nontaxable Exchanges

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81. LO.7 Howard’s roadside vegetable stand (adjusted basis of $275,000) is destroyed by a tractor-trailer accident. He receives insurance proceeds of $240,000 ($300,000 fair market value _ $60,000 coinsurance). Howard immediately uses the proceeds plus additional cash of $45,000 to build another roadside vegetable stand at the same location. What are the tax consequences to Howard?
82. LO.7 Albert owns 100 acres of land on which he grows spruce Christmas trees. His adjusted basis for the land is $100,000. He receives condemnation proceeds of $10,000 when the city’s new beltway takes 5 acres along the eastern boundary of his property. He also receives a severance award of $6,000 associated with the possible harmful effects of exhaust fumes on his Christmas trees. Albert invests the $16,000 in a growth mutual fund. Determine the tax consequences to Albert of the:
a. Condemnation proceeds.
b. Severance award.
83. LO.7 Mitchell, a calendar year taxpayer, is the sole proprietor of a fast-food restaurant.
His adjusted basis for the building and the related land is $450,000. On
March 4, 2016, state authorities notify Mitchell that his property is going to be condemned so that the highway can be widened. On June 20, Mitchell’s property is officially condemned, and he receives an award of $625,000. Because Mitchell’s business has been successful in the past, he would like to reopen the restaurant in a new location.
a. What is the earliest date Mitchell can acquire a new restaurant and qualify for § 1033 postponement?
b. On June 30, Mitchell purchases land and a building for $610,000. Assuming that he elects postponement of gain under § 1033, what is his recognized gain?
c. What is Mitchell’s adjusted basis for the new land and building?
d. If he does not elect § 1033, what are Mitchell’s recognized gain and adjusted basis?
e. Suppose he invests the $625,000 condemnation proceeds in the stock market on June 30. What is Mitchell’s recognized gain?
84. LO.7 Edith’s warehouse (adjusted basis of $450,000) is destroyed by a hurricane in
October 2016. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2017. Calculate Edith’s realized gain or loss, recognized gain or loss, and basis for the replacement property if she:
a. Acquires a new warehouse for $550,000 in January 2017.
b. Acquires a new warehouse for $500,000 in January 2017.
c. Does not acquire replacement property.
85. LO.7 Cabel’s warehouse, which has an adjusted basis of $380,000 and a fair market value of $490,000, is condemned by an agency of the Federal government to make way for a highway interchange. The initial condemnation offer is $425,000.
After substantial negotiations, the agency agrees to transfer to Cabel a surplus warehouse that he believes is worth $490,000. Cabel is a calendar year taxpayer. The condemnation and related asset transfer occur during September 2016.
a. What are the recognized gain or loss and the basis of the replacement warehouse if Cabel’s objective is to recognize as much gain as possible?
b. Advise Cabel regarding what he needs to do by what date to achieve his objective.
86. LO.7 What are the maximum postponed gain or loss and the basis for the replacement property for the following involuntary conversions?
Property
Type of
Conversion
Amount
Realized
Adjusted
Basis
Amount
Reinvested
a. Drugstore (business) Casualty $160,000 $130,000 $110,000
b. Apartments (investment) Condemned 100,000 125,000 175,000
c. Grocery store (business) Casualty 400,000 300,000 450,000
d. Residence (personal) Casualty 16,000 18,000 17,000
e. Vacant lot (investment) Condemned 240,000 160,000 220,000
f. Residence (personal) Casualty 20,000 18,000 19,000
g. Residence (personal) Condemned 18,000 20,000 26,000
h. Apartments (investment) Condemned 150,000 100,000 200,000
87. LO.7, 10 Wanda, a calendar year taxpayer, owned a building (adjusted basis of $250,000) in which she operated a bakery that was destroyed by fire in
December 2016. She receives insurance proceeds of $290,000 for the building the following March. Wanda is considering two options regarding the investment of the insurance proceeds. First, she could purchase a local building (suitable for a bakery) that is for sale for $275,000. Second, she could buy a new home for $290,000 and go back to college and finish her degree.
a. To minimize her tax liability, which of these alternatives should Wanda choose?
b. What is the latest date on which Wanda can replace the involuntarily converted property to qualify for § 1033?
c. What is the latest date on which Wanda can replace the involuntarily converted property to qualify for § 1033 if the involuntary conversion is a condemnation?
88. LO.8, 10 Karl purchased his residence on January 2, 2015, for $260,000, after having lived in it during 2014 as a tenant under a lease with an option to buy clause. On August 1, 2016, Karl sells the residence for $315,000. On June 13, 2016,
Karl purchases a new residence for $367,000.
a. What is Karl’s recognized gain? His basis for the new residence?
b. Assume instead that Karl purchased his original residence on January 2, 2014 (rather than January 2, 2015). What is Karl’s recognized gain? His basis for the new residence?
c. In part (a), what could Karl do to minimize his recognized gain?
89. LO.8 Wesley, who is single, listed his personal residence with a real estate agent on
March 3, 2016, at a price of $390,000. He rejected several offers in the $350,000 range during the summer. Finally, on August 16, 2016, he and the purchaser signed a contract to sell for $363,000. The sale (i.e., closing) took place on
September 7, 2016. The closing statement showed the following disbursements:
Real estate agent’s commission $ 21,780
Appraisal fee 600
Exterminator’s certificate 300
Recording fees 800
Mortgage to First Bank 305,000
Cash to seller 34,520
Wesley’s adjusted basis for the house is $200,000. He owned and occupied the house for seven years. On October 1, 2016, Wesley purchases another residence for $325,000.
a. Calculate Wesley’s recognized gain on the sale.
b. What is Wesley’s adjusted basis for the new residence?
c. Assume instead that the selling price is $800,000. What is Wesley’s recognized gain? His adjusted basis for the new residence?
90. LO.8 Pedro, age 57, is the sole owner of his principal residence, which he has owned and occupied for 10 years. Maria, his spouse, has also lived there
10 years. He sells the house for a realized gain of $340,000.
a. Can Pedro use the § 121 exclusion if he and Maria file a joint return? If so, what are the available amount of the exclusion and the recognized gain?
b. Can Pedro use the § 121 exclusion if he files a separate return? If so, what are the available amount of the exclusion and the recognized gain?
c. Assume instead that the realized gain is $550,000 and a joint return is filed.
d. Assume instead that the realized gain is $550,000 and separate returns are filed.
e. Assume instead that Maria and Pedro have been married for only 18 months and that she has lived in his house only since their marriage. They file a joint return.
91. LO.8 Nell, Nina, and Nora Sanders, who are sisters, sell their principal residence (owned as tenants in common) in which they have lived for the past 25 years.
The youngest of the sisters is age 60. The selling price is $960,000, selling expenses and legal fees are $63,000, and the adjusted basis is $120,000 (the fair market value of the residence when inherited from their parents 25 years ago; they made no capital improvements during the time they held the residence). Because the sisters are going to live in rental housing, they do not plan to acquire another residence. Nell has contacted you on behalf of the three sisters regarding the tax consequences of the sale.
a. Write a letter to Nell advising her of the tax consequences and how taxes can be minimized. Nell’s address is 100 Oak Avenue, Billings, MT 59101.
b. Prepare a memo for the tax files.
92. LO.8 Lloyd owns a beach house (four years) and a cabin in the mountains (six years). His adjusted basis is $300,000 in the beach house and $315,000 in the mountain cabin. Lloyd also rents a townhouse in the city where he is employed.
During the year, he occupies each of the three residences as follows:
Townhouse 135 days
Beach house 155 days
Mountain cabin 75 days
The beach house is close enough to the city so that he can commute to work during the spring and summer. While this level of occupancy may vary slightly from year to year, it is representative during the time period that Lloyd has owned the two residences.
As Lloyd plans on retiring in several years, he sells both the beach house and the mountain cabin. The mountain cabin is sold on March 3, 2016, for $540,000 (related selling expenses of $35,000). The beach house is sold on December 10, 2016, for $700,000 (related selling expenses of $42,000).
a. Calculate Lloyd’s lowest recognized gain on the sale of the two residences.
b. Assume instead that both residences satisfy the two-year ownership and use tests as Lloyd’s principal residence. Because the mountain cabin is sold first, is it possible for Lloyd to apply the § 121 exclusion to the sale of the beach house?
Why or why not?
93. LO.8, 10 Missy, age 30, has owned her principal residence (adjusted basis of $225,000) for five years. During the first three years of ownership, she occupied it as her principal residence. During the past two years, she was in graduate school and rented the residence. After graduate school, Missy returned to the same location where she previously worked. At this point, she purchased another residence for $400,000 and listed her old residence for sale at $340,000.
Due to a slow real estate market, 11 months later Missy finally receives an offer of $330,000.
a. What is Missy’s recognized gain if she immediately accepts the $330,000 offer (i.e., 11 months after the listing date)? Selling expenses are $20,000.
b. What is Missy’s recognized gain if she rejects the $330,000 offer and accepts another offer of $340,000 three months later (i.e., 14 months after the listing date)?
c. Advise Missy on which offer she should accept (assume that she is in the 28% tax bracket).
94. LO.9 Roby and James have been married for nine years. Roby sells Plum, Inc. stock that she has owned for four years to James for its fair market value of $180,000. Her adjusted basis is $200,000.
a. Calculate Roby’s recognized gain or recognized loss.
b. Calculate James’s adjusted basis for the stock.
c. How would the tax consequences in parts (a) and (b) differ if Roby had made a gift of the stock to James? Which form of the transaction would you recommend?
95. LO.9 On September 1, 2016, Marsha sells stock in Orange, Inc., for $90,000. The stock is specialized small business investment company (SSBIC) stock and was purchased on August 16, 2015, for $60,000. On September 30, 2016, Marsha purchases $85,000 of Blue, Inc., also SSBIC stock.
a. What is Marsha’s realized and recognized gain (or loss) on the sale of the Orange stock?
b. What is Marsha’s basis in the Blue stock?