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

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61. LO.3 Dan bought a hotel for $2,600,000 in January 2012. In May 2016, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2016 was $2,800,000. The fair market value six months later was $2,850,000.
a. What is the basis of the property to Ed?
b. What is the basis of the property to Ed if the fair market value six months later was $2,500,000 (not $2,850,000) and the objective of the executor was to minimize the estate tax liability?
62. LO.3 Helene and Pauline are twin sisters who live in Louisiana and Mississippi, respectively. Helene is married to Frank, and Pauline is married to Richard.
Frank and Richard are killed in an auto accident in 2016 while returning from a sporting event.
Helene and Frank jointly owned some farmland in Louisiana (value of $940,000, cost of $450,000). Pauline and Richard jointly owned some farmland in Mississippi (value of $940,000, cost of $450,000). Assume that all of Frank’s and Richard’s property passes to their surviving wives.
a. Calculate Helene’s basis in the land.
b. Calculate Pauline’s basis in the land.
c. What causes the difference?
63. LO.3, 4 Sheila sells land to Elane, her sister, for the fair market value of $40,000.
Six months later when the land is worth $45,000, Elane gives it to Jacob, her son. (No gift tax resulted.) Shortly thereafter, Jacob sells the land for $48,000.
a. Assuming that Sheila’s adjusted basis for the land is $24,000, what are Sheila’s and Jacob’s recognized gain or loss on the sales?
b. Assuming that Sheila’s adjusted basis for the land is $60,000, what are Sheila’s and Jacob’s recognized gain or loss on the sales?
64. LO.1, 2, 3, 4 Louis owns three pieces of land with an adjusted basis as follows: parcel
A, $75,000; parcel B, $125,000; and parcel C, $175,000. Louis sells parcel A to his uncle for $50,000, parcel B to his partner for $120,000, and parcel C to his mother for $150,000.
a. What is the recognized gain or loss from the sale of each parcel?
b. If Louis’s uncle eventually sells his land for $90,000, what is his recognized gain or loss?
c. If Louis’s partner eventually sells his land for $130,000, what is his recognized gain or loss?
d. If Louis’s mother eventually sells her land for $165,000, what is her recognized gain or loss?
65. LO.1, 2, 3, 4 Tyneka inherited 1,000 shares of Aqua, Inc. stock from Joe. Joe’s basis was $35,000, and the fair market value on July 1, 2016 (the date of death) was $45,000. The shares were distributed to Tyneka on July 15, 2016. Tyneka sold the stock on July 30, 2017, for $33,000. After giving the matter more thought, she decides that Aqua is a good investment and purchases 1,000 shares for $30,000 on August 20, 2017.
a. What is Tyneka’s basis for the 1,000 shares purchased on August 20, 2017?
b. Could Tyneka have obtained different tax consequences in part (a) if she had sold the 1,000 shares on December 27, 2016, and purchased the 1,000 shares on January 5, 2017? Explain.
66. LO.1, 2, 4 Abby’s home had a basis of $360,000 ($160,000 attributable to the land) and a fair market value of $340,000 ($155,000 attributable to the land) when she converted 70% of it to business use by opening a bed-and-breakfast. Four years after the conversion, Abby sells the home for $500,000 ($165,000 attributable to the land).
a. Calculate Abby’s basis for gain, loss, and cost recovery for the portion of her personal residence that was converted to business use.
b. Calculate the cost recovery deducted by Abby during the four-year period of business use, assuming that the bed-and-breakfast is opened on January 1 of year 1 and the house is sold on December 31 of year 4.
c. What is Abby’s recognized gain or loss on the sale of the business use portion?
67. LO.4 Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental property, calculate Surendra’s basis for:
a. Loss.
b. Depreciation.
c. Gain.
d. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 and then purchased another house for $320,000 to hold as rental property? Explain.
68. LO.6 Katrina owns undeveloped land with an adjusted basis of $300,000. She exchanges it for other undeveloped land worth $750,000.
a. What are Katrina’s realized and recognized gain or loss?
b. What is Katrina’s basis in the undeveloped land she receives?
c. Would the answers in parts (a) and (b) change if Katrina exchanged the undeveloped land for land and a building? Explain.
69. LO.6 Kareem owns a pickup truck that he uses exclusively in his business. The adjusted basis is $22,000, and the fair market value is $14,000. Kareem exchanges the truck for another truck that he will use exclusively in his business.
a. What are Kareem’s realized and recognized gain or loss?
b. What is his basis in the new truck?
c. What are the tax consequences to Kareem in parts (a) and (b) if he used the old truck and will use the new truck exclusively for personal purposes?
70. LO.6 Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2016, she exchanges it with Lisa Martin (an unrelated party) for undeveloped land on the West
Coast and $3,000 cash. Lisa has an adjusted basis of $72,000 for her land, and its fair market value is $89,000. As the real estate market on the East Coast is thriving, on
September 1, 2017, Lisa sells the land she acquired for $120,000.
a. What are Tanya’s recognized gain or loss and adjusted basis for the West Coast land on January 4, 2016?
b. What are Lisa’s recognized gain or loss and adjusted basis for the East Coast land on January 4, 2016?
c. What is Lisa’s recognized gain or loss from the September 1, 2017 sale?
d. What effect does Lisa’s 2017 sale have on Tanya?
e. Write a letter to Tanya advising her of the tax consequences of this exchange.
Her address is The Corral, El Paso, TX 79968.
71. LO.6 Sarah exchanges a yellow bus (used in her business) for Tyler’s gray bus and some garage equipment (used in his business). The assets have the following characteristics:
Adjusted Basis Fair Market Value
Yellow bus $6,000 $15,000
Gray bus 3,000 11,000
Equipment 2,000 4,000
a. What are Sarah’s recognized gain or loss and basis for the gray bus and garage equipment?
b. What are Tyler’s recognized gain or loss and basis for the yellow bus?
72. LO.6, 10 In two unrelated transactions, Laura exchanges property that qualifies for like-kind exchange treatment. In the first exchange, Laura gives up office equipment purchased in May 2014 (adjusted basis of $20,000; fair market value of $17,000) in exchange for new office equipment (fair market value of $15,000) and $2,000 cash. In the second exchange, Laura receives a parking garage (to be used in her business) with a fair market value of $50,000 in exchange for a plot of land she had held for investment. The land was purchased in April 2008 for $12,000 and has a current fair market value of $48,000. In addition to transferring the land, Laura pays an additional $2,000 to the other party.
a. What is Laura’s adjusted basis for the office equipment?
b. When does the holding period begin?
c. What is Laura’s adjusted basis for the parking garage?
d. When does the holding period begin?
e. How could Laura structure either of the transactions differently to produce better tax consequences?
73. LO.6 Susan owns a car that she uses exclusively for personal purposes. Its original cost was $26,000, and the fair market value is $12,000. She exchanges the car and $18,000 cash for a new car.
a. Calculate Susan’s realized and recognized gain or loss.
b. Calculate Susan’s basis for the new car.
c. Determine when Susan’s holding period for the new car begins.
74. LO.6 Stephanie owns a machine (adjusted basis of $90,000; fair market value of $125,000) that she uses in her business. She exchanges it for another machine (worth $100,000) and stock (worth $25,000). Determine Stephanie’s:
a. Realized and recognized gain or loss on the exchange.
b. Basis in the new machine.
c. Basis in the stock she received.
75. LO.6 Ed owns investment land with an adjusted basis of $35,000. Polly has offered to purchase the land from Ed for $175,000 for use in a real estate development.
The amount offered by Polly is $10,000 in excess of what Ed perceives as the fair market value of the land. Ed would like to dispose of the land to Polly but does not want to incur the tax liability that would result. He identifies an office building with a fair market value of $175,000 that he would like to acquire. Polly purchases the office building and then exchanges the office building for Ed’s land.
a. Calculate Ed’s realized and recognized gain on the exchange and his basis for the office building.
b. Calculate Polly’s realized and recognized gain on the exchange and her basis in the land.
76. LO.6 Steve owns Machine A (adjusted basis of $12,000 and fair market value of $15,000), which he uses in his business. Steve sells Machine A for $15,000 to
Aubry (a dealer) and then purchases Machine B for $15,000 from Joan (also a dealer). Machine B would normally qualify as like-kind property.
a. What are Steve’s realized and recognized gain on the sale of Machine A?
b. What is Steve’s basis for Machine B?
c. What factors would motivate Steve to sell Machine A and purchase Machine B rather than exchange one machine for the other?
d. Assume that the adjusted basis of Machine A is $15,000 and the fair market value of both machines is $12,000. Respond to parts (a) through (c).
77. LO.6 Tab exchanges real estate used in his business along with stock for real estate to be held for investment. The stock transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has an adjusted basis of $85,000 and a fair market value of $190,000. The real estate acquired has a fair market value of $240,000.
a. What is Tab’s realized gain or loss?
b. His recognized gain or loss?
c. The basis of the newly acquired real estate?
78. LO.6, 10 Tom and Frank are brothers. Each owns investment property in the other’s hometown. To make their lives easier, they decide to exchange the investment properties legally. Under the terms of the exchange, Frank will transfer realty (adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty (adjusted basis of $60,000; fair market value of $92,000). Tom’s property is subject to a mortgage of $12,000 that will be assumed by Frank.
a. What are Frank’s and Tom’s recognized gains?
b. What are their adjusted bases?
c. As an alternative, Frank has proposed that rather than assuming the mortgage, he will transfer cash of $12,000 to Tom. Tom would use the cash to pay off the mortgage. Advise Tom on whether this alternative would be beneficial to him from a tax perspective.
79. LO.6 Determine the realized, recognized, and postponed gain or loss and the new basis for each of the following like-kind exchanges:
Adjusted Basis of
Old Machine Boot Given
Fair Market Value of New Asset
Boot
Received
a. $ 7,000 $ –0– $12,000 $4,000
b. 14,000 2,000 15,000 –0–
c. 3,000 7,000 8,000 500
d. 15,000 –0– 29,000 –0–
e. 10,000 –0– 11,000 1,000
f. 17,000 –0– 14,000 –0–
80. LO.6 Shontelle owns an apartment house that has an adjusted basis of $760,000 but is subject to a mortgage of $192,000. She transfers the apartment house to
Dave and receives from him $120,000 in cash and an office building with a fair market value of $780,000 at the time of the exchange. Dave assumes the $192,000 mortgage on the apartment house.
a. What is Shontelle’s realized gain or loss?
b. What is her recognized gain or loss?
c. What is the basis of the newly acquired office building?