EA2 Study Unit 6.1-6.4 Questions PDF

3)Several years ago, you paid \$150,000 to build your home on a lot that cost you \$50,000. Before converting the property to rental use last year, you paid \$30,000 for permanent improvements to the house. You received a \$5,000 easement payment from the State of California for use of the land for...

3)Several years ago, you paid \$150,000 to build your home on a lot that cost you \$50,000. Before converting the property to rental use last year, you paid \$30,000 for permanent improvements to the house. You received a \$5,000 easement payment from the State of California for use of the land for a power line. The county indicates the FMV of the house is \$250,000 and the land is \$100,000. What is your basis for depreciation? A.\$150,000 B.\$250,000 **C.\$180,000** **Answer (C) is correct.\ For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion. The adjusted basis in the house on the date of conversion is \$180,000 (\$150,000 + \$30,000). The FMV of the house on the date of conversion is \$250,000. Accordingly, the depreciable basis for the house is \$180,000. The \$5,000 easement is related to the land, which is not depreciated (Publication 551).** D.\$175,000 Answer (D) is incorrect.\ The \$5,000 easement is related to the land, which is not depreciated. === 5\) Fact Pattern: ** **Michael owned a building as part of his active trades with an adjusted basis of \$80,000 and land with an adjusted basis of \$20,000. A tornado leveled the building. Michael used an insurance settlement of \$140,000 plus \$25,000 from a mortgage to construct a new building on the same land within 1 year. Assuming Michael elects any possible gain deferral, his recognized gain from the insurance settlement will be A.\$40,000 Answer (A) is incorrect.\ The figure of \$40,000 is not the correct amount of recognized gain from the insurance settlement. **B.\$0** **Answer (B) is correct.\ This situation qualifies as an involuntary conversion. Section 1033(a) provides that, if the property is converted into money or other property not similar or related in service or use to the converted property, as in the case of insurance proceeds, the taxpayer may elect to defer gain by investing an amount equal to or greater than that of the proceeds received in the conversion. Since Michael reinvested an amount greater than the insurance proceeds in similar property, he will not be required to recognize any gain.** C.\$85,000 D.\$60,000 === 6)Mr. A exchanged stock and real estate that he held for investment for other real estate he intends to hold for investment. The stock at the time of the exchange had a fair market value of \$30,000 and an adjusted basis to Mr. A of \$27,000. Mr. A's old real estate had a fair market value of \$150,000 and an adjusted basis to him of \$90,000. The real estate acquired by Mr. A had a fair market value of \$180,000 at the time of the exchange. What is the amount of Mr. A's recognized gain (or loss) on the exchange? A.\$0 Answer (A) is incorrect.\ A gain must be recognized. **B.\$3,000** **Answer (B) is correct.\ Neither gain nor loss is recognized on an exchange of like-kind property held for productive use in a trade or business or for investment \[Sec. 1031(a)\]. In addition, recognition of gain or loss is not triggered when boot is given. However, when boot is given, there is no provision preventing recognition of gain or loss on the boot itself. The stock Mr. A exchanged with the real estate is boot. Hence, Mr. A realizes and recognizes a \$3,000 gain on the stock (\$30,000 fair market value -- \$27,000 adjusted basis). There is no other gain or loss on the exchange because the old and new real estate exchange qualifies under Sec. 1031.** C.\$30,000 D.\$(30,000) === 7)In June of Year 1, Mr. Arnett paid \$82,600 for real property to be used as a manufacturing plant. Mr. Arnett allocated the cost to land as \$10,325 and to building as \$72,275. From Year 1 to Year 4, Mr. Arnett incurred the following expenses related to this property: Building remodeling before placed in service \$20,000 Depreciation expense 14,526 Casualty loss not covered by insurance 5,000 Fire damage restoration 5,500 What is the adjusted basis of the building and land as of January 1, Year 5? A.Building, \$88,249; land, \$10,825. B.Building, \$78,249; land, \$10,325. **Answer (B) is correct.\ Basis is adjusted by capitalizable costs minus depreciation and deductions. The basis of the building is computed as follows:** **Original cost of building \$72,275** **Adjustments to basis Add: Improvements \$20,000 +Repair of fire damage 5,500 = 25,500 ==\> Total of \$97,775** **Subtract: Depreciation \$14,526 - Deducted casualty loss 5,000 =19,526** **Adjusted basis on January 1, Year 5 = \$78,249** **The basis of the land, \$10,325, remains unchanged. It is not affected by any of the above adjustments, which affect only the basis of the building.** C.Building, \$77,749; land, \$10,825. D.Building, \$92,275; land, \$20,825. === 8)Rebecca exchanges real estate held for investment with an adjusted basis of \$400,000 and a mortgage of \$100,000 for other real estate to be held for investment. The other party agrees to assume the mortgage. The fair market value of the real estate Rebecca receives is \$500,000. She pays exchange expenses of \$10,000. What amount of gain does Rebecca realize? A.\$200,000 **B.\$190,000** **Answer (B) is correct.\ This transaction is a like-kind exchange. The real estate had an adjusted basis of \$400,000 and was exchanged for property that has a FMV of \$500,000. She was also relieved of a \$100,000 mortgage, which is the same as receiving cash, and the \$10,000 in expenses reduces the realized gain. Therefore, the realized, not recognized, gain is the \$100,000 in the exchange of properties plus the \$100,000 in mortgage relief minus the \$10,000 in expenses to give a total gain of \$190,000.** C.\$90,000 D.\$100,000 === 9)Reggie owned land used in his business that had an adjusted basis to him of \$12,000 and was subject to an outstanding liability of \$2,000. In exchange for the asset, Reggie received land of like-kind to be used in his business, plus \$1,000 in cash. The land received had a fair market value of \$14,000 at the time of the exchange. Reggie's liability was assumed by the other party for legitimate business purposes. What is Reggie's basis in the new asset? **A.\$12,000** **Answer (A) is correct.\ The basis of property received in a like-kind exchange is the adjusted basis of the property given up, increased by the gain recognized and decreased by any boot received and the loss recognized. Section 1031(b) provides that, if boot is received in addition to the like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain on the exchange. The amount of boot received is \$3,000 (\$1,000 cash + \$2,000 liabilities relief), and the amount of gain realized on the exchange is \$5,000 (\$14,000 FMV received + \$1,000 cash received + \$2,000 liability relief -- \$12,000 basis) of which \$3,000 will be recognized. The basis of the property received is therefore \$12,000 (\$12,000 basis -- \$3,000 boot received + \$3,000 recognized gain).** B.\$10,000 C.\$9,000 D.\$11,000 Answer (D) is incorrect.\ The basis of property received in a like-kind exchange is the adjusted basis of the property given up, increased by the recognized gain and decreased by the boot received and the loss recognized. === 10)Several years ago Nia paid \$160,000 to have her home built on a lot that cost her \$10,000. Before changing the property to rental use last year, she paid \$20,000 for permanent improvements to the house and claimed a \$2,000 (federally declared) casualty loss deduction for damage to the house. On the date of change in use, her property has a FMV of \$180,000, of which \$30,000 is for the land and \$150,000 is for the house. Her depreciable basis for the house is A.\$160,000 **B.\$150,000** **Answer (B) is correct.\ For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion. Nia's adjusted basis in the house on the date of conversion is \$178,000 (\$160,000 beginning basis + \$20,000 paid for permanent improvements -- \$2,000 casualty loss deduction). The FMV of the house on the date of conversion is \$150,000. Accordingly, Nia's depreciable basis for the house is \$150,000.** C.\$180,000 D.\$178,000 Answer (D) is incorrect.\ The adjusted basis of the house is \$178,000. The depreciable basis is the lesser of the adjusted basis and the FMV. === 11)Mr. Black purchased his first house in March for \$41,000. In addition, Mr. Black incurred the following expenses: \$360 for 3 years of casualty insurance \$820 for new driveway \$250 interior painting \$145 title insurance \$400 exterior painting \$405 new gutters What is Mr. Black's basis in this house? **A.\$43,020** **Answer (A) is correct.\ Under Sec. 1012, the basis of property is the cost of the property. In addition, basis includes expenditures for major improvements and costs to acquire title. The cost that is not capitalized is the casualty insurance. The interior painting and exterior painting are usually considered ordinary maintenance. However, when painting is part of a larger project that includes capital improvements to the building's structure, the painting costs are capitalized. Furthermore, these costs are not deductible unless the house is rental property, i.e., unless the costs were incurred for the production of income. Basis is computed as follows:** **Purchase price \$41,000** **New driveway 820** **Title insurance 145** **New gutters 405** **Interior painting 250** **Exterior painting 400** **Basis in house \$43,020** B.\$42,370 Answer (B) is incorrect.\ The title insurance is also included in the basis. C.\$43,380 D.\$42,620 === 13)Morris Chevy purchased a horse farm in Ocala, Florida. \$10,000 of the purchase price was properly allocated to the barn. Several months after the purchase, Morris built an addition to the barn at a cost of \$2,000. In the subsequent year, Morris expended \$800 to paint the barn, repair broken windows, and have the inside thoroughly cleaned. What is Morris's basis in the barn at the end of the second year, excluding depreciation? A.\$12,800 Answer (A) is incorrect.\ The painting, repairing, and cleaning do not qualify as improvements. **B.\$12,000** **Answer (B) is correct.\ Under Reg. 1.162-4, repairs are deductible, while improvements that prolong the life of property or materially increase its value must be capitalized. Under Sec. 1016(a)(1), expenditures properly chargeable to capital increase the basis of property. An addition to a barn is considered an improvement, but fixing broken windows, painting, and cleaning are generally considered repairs. Morris's basis (excluding depreciation) is \$12,000 (\$10,000 purchase price + \$2,000 improvements).** C.\$10,000 D.\$10,800 === 14)Romano owns a building held for investment purposes that has an adjusted basis to him of \$225,000 and a fair market value of \$660,000. This building is subject to a mortgage of \$135,000. Mike would like to purchase Romano's building and makes the following offer: \$75,000 in cash Assumption of Romano's mortgage. A building owned by Mike that is held for investment purposes and has a fair market value of \$450,000. The building has no mortgage on it. What is the amount of Romano's recognized gain if he accepts Mike's offer? A.\$360,000 B.\$225,000 **C.\$210,000** **Answer (C) is correct.\ Section 1031(b) provides that, if boot is received in addition to like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain realized. The amount of boot received is \$210,000 (\$75,000 cash + \$135,000 liability relief), and the amount of gain on the exchange is \$435,000 (\$450,000 FMV of property received + \$75,000 cash + \$135,000 liability relief -- \$225,000 basis of property given). The lesser of these two amounts is \$210,000.** D.\$435,000 Answer (D) is incorrect.\ The amount of boot received is less than the gain on the exchange. === 17)During the current year, Mr. G had business property that had an adjusted basis of \$78,000, condemned by the state. The state paid G \$93,000 for the property. Mr. G immediately purchased similar new property for \$87,000. G properly reported a \$6,000 gain on his current-year federal income tax return. What is the amount of Mr. G's basis in the new property? A.\$72,000 B.\$93,000 Answer (B) is incorrect.\ The amount of the award is \$93,000. C.\$87,000 **D.\$78,000** **Answer (D) is correct.\ Section 1033(a)(2) provides for a taxpayer to elect nonrecognition of gain as a result of an involuntary conversion when money is received and used to replace the converted property within 2 years of the conversion. Section 1033(a)(2), however, requires recognition of gain to the extent the amount realized on conversion exceeds the cost of replacement property.** **Mr. G realizes a \$15,000 gain (\$93,000 condemnation proceeds -- \$78,000 basis of converted property) but is only required to recognize \$6,000 (\$93,000 condemnation proceeds -- \$87,000 cost of replacement property). Under Sec. 1033(b), the basis of replacement property is its purchase price less any realized gain not recognized. Therefore, Mr. G's basis in the replacement property is \$78,000 (\$87,000 cost of replacement property -- \$9,000 realized gain not recognized).** === 0)Which of the following items does NOT increase the basis of property? A.Legal fees for defending title to the property. **B.The cost of painting the interior of the building.** **Answer (B) is correct.\ Capital expenditures add to the value of property or adapt the property to a new or different use (Reg. 1.263). Capital expenditures increase the basis of property. The cost of painting the interior of the building is not a capital expenditure. Rather, it is a cost that is deductible as an ordinary and necessary business expense. Therefore, the cost of painting does not increase the basis of the building.** C.Assessments for items that increase the value of the property. D.The cost of extending utility service lines to the property. Answer (D) is incorrect.\ The cost of extending utility service lines increases the value of the property and is a capital expenditure. Fred exchanged his rental property with an adjusted basis of \$220,000 and an FMV of \$250,000 for a storefront worth \$230,000 and paid \$20,000 cash. Fred paid exchange costs of \$15,000 from his personal checking account. The property given up had a mortgage of \$100,000 that the other party in the trade assumed. Fred assumed a \$90,000 liability on the new property. What is Fred's recognized gain? 230+100-20-15-90-220=-15 Loss Realized. Since it is a like-kind exchange, the recognized gain (loss) is \$0 === 1\) Fact Pattern: Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year). A machine used in the business was sold for \$400,000. It cost \$330,000 when purchased 3 years ago, and its adjusted tax basis when sold was \$210,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been \$99,000. A \$500,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was \$524,000. A new warehouse was rebuilt at a cost of \$600,000. Question1)What is the basis of the new warehouse? A.\$524,000 B.\$624,000 Answer (B) is incorrect.\ Adding the recognized loss to the cost of the new warehouse results in \$624,000. **C.\$600,000** **Answer (C) is correct.\ The realized loss was fully recognized, so the basis of the new warehouse is its cost of \$600,000.** D.\$576,000 === 3)The Needle and Thread Partnership traded an old warehouse having an adjusted basis of \$10,000 and cash of \$2,000 for a new warehouse with a fair market value of \$15,000. What is the recognized gain and what is the basis of the new warehouse? Gain Basis A. Gain \$2,000 Basis \$15,000 B. Gain \$0 Basis \$10,000 **C. Gain \$0 Basis \$12,000** **Answer (C) is correct.\ Section 1031 defers recognizing gain or loss to the extent that real property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like kind. Like-kind property is alike in nature or character, but not necessarily in grade or quality. Boot is all nonqualified property transferred in an exchange transaction. Qualified property received in a like-kind exchange has an exchanged basis adjusted for boot and gain recognized.** **AB of property given + Gain recognized + Boot given (cash, liability incurred, other property) -- Boot received (cash, liability relief, other property) + Exchange fees incurre -- Loss recognized (boot given) = Basis in acquired property** **The formula yields: \$10,000 + \$0 + \$2,000 -- \$0 = \$12,000** D. Gain \$3,000 Basis \$12,000 Answer (D) is incorrect.\ Section 1031 defers recognition of gain or loss on property productively used in a trade or business. === Katrina transferred an apartment building held for investment to Mona in exchange for an office building. The apartment building was subject to a liability of \$10,000 which Mona assumed for legitimate business purposes. The office building had an adjusted basis of \$20,000 and a fair market value of \$35,000. The apartment building had a fair market value of \$50,000 and an adjusted basis of \$30,000. Katrina received \$5,000 cash in addition to receiving the office building. What is Katrina's recognized gain on this exchange? **A.\$15,000** **Answer (A) is correct.\ Since the transaction qualifies as a like-kind exchange, Sec. 1031(b) requires gain to be recognized only to the extent of boot received. Regulation 1.1031(d)-2 provides that liabilities assumed by the other party are to be treated as money received by the taxpayer. Thus, the total boot received by Katrina is \$15,000 (\$5,000 cash received + \$10,000 of liabilities transferred). Katrina realizes a gain of \$20,000 (\$35,000 FMV of property received + \$10,000 of liabilities transferred + \$5,000 cash -- \$30,000 adjusted basis of property transferred). The gain recognized is the lesser of total boot received (\$15,000) or the realized gain (\$20,000).** B.\$5,000 C.\$0 Answer (C) is incorrect.\ A gain is recognized for the boot received.[ ](https://www.livejournal.com/away?to=https%3A%2F%2Fwww.gleim.com%2Ftestprep%2Fea%2F2019%2Fpart2%3Fpage%3Doutline%26stuNumber%3D6%26topicNumber%3D3%236.3) D.\$20,000 === 13)Romano owns a building held for investment purposes that has an adjusted basis to him of \$225,000 and a fair market value of \$660,000. This building is subject to a mortgage of \$135,000. Mike would like to purchase Romano's building and makes the following offer: \$75,000 in cash Assumption of Romano's mortgage A building owned by Mike that is held for investment purposes and has a fair market value of \$450,000. The building has no mortgage on it. What is the amount of Romano's recognized gain if he accepts Mike's offer? A.\$360,000 B.\$435,000 Answer (B) is incorrect.\ The amount of boot received is less than the gain on the exchange. C.\$225,000 **D.\$210,000** **Answer (D) is correct.\ Section 1031(b) provides that, if boot is received in addition to like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain realized. The amount of boot received is \$210,000 (\$75,000 cash + \$135,000 liability relief), and the amount of gain on the exchange is \$435,000 (\$450,000 FMV of property received + \$75,000 cash + \$135,000 liability relief -- \$225,000 basis of property given). The lesser of these two amounts is \$210,000.** === 18)Tom owns a building held for investment purposes that has an adjusted basis of \$150,000 and a fair market value of \$440,000. This building is subject to a mortgage of \$90,000. Bob would like to purchase Tom's building and makes the following offer: 1. \$50,000 in cash 2. Assumption of Tom's mortgage 3. A building owned by Bob that he holds for investment purposes that has a fair market value of \$300,000. (The building is not subject to a mortgage.) What is Tom's taxable gain if he accepts Bob's offer and continues to hold Bob's building for investment? A.\$150,000 **B.\$140,000** **Answer (B) is correct.\ Section 1031(b) provides that, if boot is received in addition to like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain realized. The amount of boot received is \$140,000 (\$50,000 cash + \$90,000 liability relief), and the amount of gain on the exchange is \$290,000 (\$440,000 FMV of property received -- \$150,000 basis). The lesser of these two amounts is the recognized gain, \$140,000.** C.\$240,000 D.\$290,000 Answer (D) is incorrect.\ The amount of the boot received is less than the gain realized on the exchange. === 19)Nelson, Inc., owned a manufacturing building with a fair market value of \$95,000 and an adjusted basis of \$75,000. Nelson, Inc., entered into an agreement to exchange the manufacturing building for a warehouse with an adjusted basis of \$80,000 and a fair market value of \$100,000 with Roberts Corporation. In addition, Nelson, Inc., would pay Roberts Corporation \$5,000 in cash. Nelson, Inc., also incurred and paid attorney and deed preparation fees of \$5,000 on this exchange. What is Nelson's basis in the warehouse it received in this like-kind exchange? A.\$95,000 B.\$110,000 **C.\$85,000** **Answer (C) is correct.\ Section 1031 defers recognizing gain or loss to the extent that real property productively used in a trade or business or held for the production of income (investment) is exchanged for property of like-kind. The basis in the property equals the adjusted basis of the property given plus any gain recognized, boot given, and legal fees incurred, and less any boot received and loss recognized. Thus, the basis in the new property equals \$85,000 (\$75,000 adjusted basis of property given + \$5,000 boot given + \$5,000 legal fees incurred).** D.\$100,000 Answer (D) is incorrect.\ The basis in the new property does not equal the FMV of that property. === 24)All of the following statements regarding tax-free like-kind exchanges are true **EXCEPT** A.The property must be held for productive use in a trade or business, or it must be investment property. Answer (A) is incorrect.\ It is true regarding tax-free like-kind exchanges. B.The property must be real property. **C.If you pay money in addition to giving up real property in a like-kind exchange, you may have a taxable gain or deductible loss.** **Answer (C) is correct.\ Section 1031(a)(1) requires that real property qualifying for tax-free treatment must be held for productive use in a trade or business or investment. Section 1031(a)(2) exempts real property held for sale (i.e., inventory) from tax-free exchange treatment. Section 1031(a) requires that property exchanged tax-free must be of like-kind. Like-kind refers to nature or character, but not necessarily grade or quality. Based on the above, all of the answer choices except the correct answer are true. Although Sec. 1031(b) requires that gain be recognized to the extent of boot received, there is no requirement that gain or loss be recognized to the extent of boot given. Thus, the statement, "If you pay money in addition to giving up like property in a like-kind exchange, you may have a taxable gain or deductible loss," is not true.** D.The exchange of an apartment building for similar condominium property may qualify for a tax-free exchange. === **Practice Exam Review --- Study Unit 6.1, 6.3 (12 Questions selected). Passing Score: 75 %** 2)Reggie owned land used in his business that had an adjusted basis to him of \$12,000 and was subject to an outstanding liability of \$2,000. In exchange for the asset, Reggie received land of like-kind to be used in his business, plus \$1,000 in cash. The land received had a fair market value of \$14,000 at the time of the exchange. Reggie's liability was assumed by the other party for legitimate business purposes. What is Reggie's basis in the new asset? **A.\$12,000** **Answer (A) is correct.\ The basis of property received in a like-kind exchange is the adjusted basis of the property given up, increased by the gain recognized and decreased by any boot received and the loss recognized. Section 1031(b) provides that, if boot is received in addition to the like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain on the exchange. The amount of boot received is \$3,000 (\$1,000 cash + \$2,000 liabilities relief), and the amount of gain realized on the exchange is \$5,000 (\$14,000 FMV received + \$1,000 cash received + \$2,000 liability relief -- \$12,000 basis) of which \$3,000 will be recognized. The basis of the property received is therefore \$12,000 (\$12,000 basis -- \$3,000 boot received + \$3,000 recognized gain).** B.\$10,000 C.\$11,000 Answer (C) is incorrect.\ The basis of property received in a like-kind exchange is the adjusted basis of the property given up, increased by the recognized gain and decreased by the boot received and the loss recognized. D.\$9,000 === 11)Several years ago, you paid \$150,000 to build your home on a lot that cost you \$50,000. Before converting the property to rental use last year, you paid \$30,000 for permanent improvements to the house. You received a \$5,000 easement payment from the State of California for use of the land for a power line. The county indicates the FMV of the house is \$250,000 and the land is \$100,000. What is your basis for depreciation? A.\$250,000 B.\$150,000 **C.\$180,000** **Answer (C) is correct.\ For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion. The adjusted basis in the house on the date of conversion is \$180,000 (\$150,000 + \$30,000). The FMV of the house on the date of conversion is \$250,000. Accordingly, the depreciable basis for the house is \$180,000. The \$5,000 easement is related to the land, which is not depreciated (Publication 551).** D.\$175,000 Answer (D) is incorrect.\ The \$5,000 easement is related to the land, which is not depreciated. === 12)On August 15 of the current year, Harold received 100 shares of stock as an inheritance from his mother, Mona, who died on January 20. Mona's adjusted basis in the stock was \$45,000. The stock had a fair market value of \$50,000 on January 20. On July 20, its value was \$65,000, and on the date Harold received it, its value was \$48,000. The alternative valuation date was not selected. Harold's basis in the inherited stock is A.\$48,000 B.\$65,000 C.\$45,000 Answer (C) is incorrect.\ Since the alternate valuation date was not selected, the basis of the inherited stock equals the stock's FMV at the death of the decedent. **D.\$50,000** **Answer (D) is correct.\ The basis of property received from a decedent is generally the FMV of the property on the date of the decedent's death \[Sec. 1014(a)\]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their FMV 6 months after death. Harold's basis in the stock is the \$50,000 FMV on January 20 (the date of Mona's death).** ==== 5)Matt and Jason, partners in the M&J Partnership, began business on June 15 of the current year. The business incurred the following expenses prior to June 15: 1. Purchase of a commercial building for \$200,000. 2. New electrical wiring at a cost of \$27,000. 3. New plumbing at a cost of \$75,000. 4. Light fixtures (not part of the wiring) replaced at a cost of \$6,500. These light fixtures were of the same quality as the previous ones. What is the cost of improvements? A.\$102,000 Answer (A) is incorrect.\ The cost of the light fixtures is an improvement and should be included with the cost of the new electrical wiring and the new plumbing. B.\$275,000 C.\$108,500 Answer (C) is correct.\ If the improvements to a business asset result in a betterment to the unit of property, restore the unit of property, or adapt the unit of property to a new or different use, the costs must be capitalized. Some examples of improvements include rewiring or replumbing of a building, replacing an entire roof, increasing the production output equipment, putting an addition on a building, strengthening the foundation of a building so it can be used for a new purpose, or replacing a major component or substantial structural part of a machine. The costs of routine repairs or maintenance that do not improve a unit of property, but keep the property in an ordinary, efficient operating condition, are deducted (Publication 535). The cost of improvements includes the \$27,000 in wiring, \$75,000 in new plumbing, and \$6,500 in light fixtures. D.\$200,000 === 6)The uniform capitalization rules will apply in all of the following situations EXCEPT A.Acquire property for resale, and average annual gross receipts exceed \$29 million. B.Produce real or tangible personal property for use in a business or activity carried on for profit and average annual gross receipts exceed \$29 million. Answer (B) is incorrect.\ Real or tangible personal property produced for use in a business or activity carried on for profit is subject to the uniform capitalization rules if average annual gross receipts are more than \$29 million. C.Produce property under a long-term contract other than a home construction. Answer (C) is correct.\ Uniform capitalization rules determine the costs and expenditures, including interest, that must be capitalized by a taxpayer. These uniform capitalization rules apply to all real and tangible personal property that is produced by a taxpayer and to all real or personal property that is acquired by a taxpayer for resale. However, these rules apply only to property used in a taxpayer's trade or business or in an activity engaged in for profit. They do not apply to property that is used for personal purposes, to timber, or to any property that is being produced under a long-term contract. D.Produce real or tangible personal property for sale to customers and average annual gross receipts exceed \$29 million. === 7)Mr. Black purchased his first house in March for \$41,000. In addition, Mr. Black incurred the following expenses: \$360 for 3 years of casualty insurance \$820 for new driveway \$250 interior painting \$145 title insurance \$400 exterior painting \$405 new gutters What is Mr. Black's basis in this house?  A.\$43,380 B.\$42,620 C.\$42,370 Answer (C) is incorrect.\ The title insurance is also included in the basis. D.\$43,020 Answer (D) is correct.\ Under Sec. 1012, the basis of property is the cost of the property. In addition, basis includes expenditures for major improvements and costs to acquire title. The cost that is not capitalized is the casualty insurance. The interior painting and exterior painting are usually considered ordinary maintenance. However, when painting is part of a larger project that includes capital improvements to the building's structure, the painting costs are capitalized. Furthermore, these costs are not deductible unless the house is rental property, i.e., unless the costs were incurred for the production of income. Basis is computed as follows: Purchase price \$41,000 New driveway 820 Title insurance 145 New gutters 405 Interior painting 250 Exterior painting 400 ****Basis in house \$43,020**** === 19)Which of the following items does NOT increase the basis of property? A.The cost of painting the interior of the building. Answer (A) is correct.\ Capital expenditures add to the value of property or adapt the property to a new or different use (Reg. 1.263). Capital expenditures increase the basis of property. The cost of painting the interior of the building is not a capital expenditure. Rather, it is a cost that is deductible as an ordinary and necessary business expense. Therefore, the cost of painting does not increase the basis of the building. B.Legal fees for defending title to the property.C.The cost of extending utility service lines to the property. Answer (C) is incorrect.\ The cost of extending utility service lines increases the value of the property and is a capital expenditure. D.Assessments for items that increase the value of the property. === 22)Under the capitalization rules, amounts paid for which of the following activities are generally required to be capitalized? A.Materially enlarging a unit of property.  Answer (A) is correct.\ Materially enlarging a unit of property is an example of a betterment. Betterments must be capitalized. B.Installation of a new heating system that costs \$8,000 and for which IRC 179 is elected. C.Replacing a major component or substantial structural part of a unit of property that does not extend the property's life. Answer (C) is incorrect.\ Replacing major components or substantial structural parts of a unit of property that do not extend the property's life is expensed. D.Repair and maintenance that does not improve a unit of tangible property. === 23)The Andee Partnership traded its farm land with an adjusted basis of \$10,000 for barren land with a fair market value of \$15,000. Andee also received \$3,500 cash on the trade. What is the gain, if any, on this trade? A.\$1,500 Answer (A) is incorrect.\ The boot received increases the realized gain. The gain is equal to the amount of boot received, but not exceeding realized gain. B.\$3,500 Answer (B) is correct.\ A partially nontaxable exchange occurs when cash or unlike property are received in addition to like-kind real property. If boot (cash or nonqualified property) is received in addition to like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain realized. In this case, Andee Partnership received boot of \$3,500 cash in addition to the like-kind real property received. The realized gain of \$8,500 (\$15,000 fair market value of the barren land + \$3,500 cash received -- \$10,000 adjusted basis of the farm land) is taxed only to the extent of the cash received, or \$3,500. Thus, the gain on the trade is \$3,500 (Publication 544). C.\$0 D.\$5,000 === 24)Rebecca exchanges real estate held for investment with an adjusted basis of \$400,000 and a mortgage of \$100,000 for other real estate to be held for investment. The other party agrees to assume the mortgage. The fair market value of the real estate Rebecca receives is \$500,000. She pays exchange expenses of \$10,000. What amount of gain does Rebecca realize? A.\$100,000 B.\$90,000 Answer (B) is incorrect.\ The amount of \$90,000 does not take into account the \$100,000 mortgage that is assumed. When someone takes over debt, it is the same as receiving cash. This \$100,000 is added to the gain realized. C.\$200,000 D.\$190,000 Answer (D) is correct.\ This transaction is a like-kind exchange. The real estate had an adjusted basis of \$400,000 and was exchanged for property that has a FMV of \$500,000. She was also relieved of a \$100,000 mortgage, which is the same as receiving cash, and the \$10,000 in expenses reduces the realized gain. Therefore, the realized, not recognized, gain is the \$100,000 in the exchange of properties plus the \$100,000 in mortgage relief minus the \$10,000 in expenses to give a total gain of \$190,000. === 29)Joe traded an apartment building with an adjusted basis of \$100,000 and received a new apartment building with a fair market value of \$90,000 and \$15,000 cash. What is the basis of Joe's new apartment building? A.\$105,000 Answer (A) is incorrect.\ The amount of \$105,000 does not subtract the \$15,000 boot that was received. B.\$85,000 C.\$100,000 D.\$90,000 Answer (D) is correct.\ Qualified real property received in a like-kind exchange has an exchange basis adjusted for boot and gain recognized. The adjusted basis of the property given is increased by the gain recognized and the boot given, and then it is decreased by the boot received and loss recognized. A gain in a like-kind exchange is recognized equal to the lesser of gain realized or boot received. The old apartment building has a basis of \$100,000 and is exchanged for a new apartment building with a FMV of \$90,000 and \$15,000 in cash; thus, there is a gain of \$5,000. This is added to the adjusted basis of the building given up, and the \$15,000 in boot is subtracted to get \$90,000. === 31)Elder Company wants to acquire commercial property located on Main Street. Ms. Cheung, one of Elder's customers, owns the property and uses it in her business. Elder offers to give Ms. Cheung the land it owns next to its business and inventory items worth \$70,000 in exchange for her Main Street property. Ms. Cheung's basis in her Main Street property is \$160,000, and its fair market value is \$350,000. The land owned by Elder has an adjusted basis to Elder of \$90,000 and a fair market value of \$280,000. Ms. Cheung will hold the land she receives from Elder for investment purposes. What is the amount of Ms. Cheung's recognized gain if she accepts the offer? A.\$0 B.\$120,000 C.\$70,000 Answer (C) is correct.\ The transaction would qualify for like-kind treatment under Sec. 1031 since Ms. Cheung is exchanging real property used in her trade or business for real property held for investment purposes. Section 1031(b) requires that a gain be recognized in a like-kind exchange only to the extent that nonlike-kind property is received. Since the inventory items received by Ms. Cheung are personal property, they are considered nonlike-kind (boot) property. Inventory is also excluded from being like-kind property. Ms. Cheung realizes a gain of \$190,000 (\$280,000 FMV of new property + \$70,000 FMV of inventory -- \$160,000 basis of old property). The gain recognized is the lesser of the boot received (\$70,000) or the realized gain (\$190,000). D.\$190,000 Answer (D) is incorrect.\ The gain recognized is the lesser of the boot received or the realized gain. === 32)Jerome owns a building held for investment purposes that has an adjusted basis to him of \$150,000 and a fair market value of \$430,000. This building is subject to a mortgage of \$90,000. Jake would like to purchase Jerome's building and makes the following offer: \$50,000 in cash; assumption of Jerome's mortgage; a building owned by Jake that he holds for investment purposes and has a fair market value of \$300,000. The building is not subject to a mortgage. What is Jerome's taxable gain if he accepts Jake's offer and continues to hold Jake's building for investment?A.\$240,000 B.\$140,000 Answer (B) is correct.\ Section 1031(b) provides that, if boot is received in addition to like-kind property, the amount of recognized gain is the lesser of the amount of boot received or the amount of gain realized. The amount of boot received is \$140,000 (\$50,000 cash + \$90,000 liability relief), and the amount of gain realized on the exchange is \$290,000 (\$440,000 FMV of property received -- \$150,000 basis). The lesser of these two amounts is \$140,000. C.\$150,000 D.\$290,000 Answer (D) is incorrect.\ The amount of boot received is less than the gain realized on the exchange. === 33)Mr. Monty owned an office building that he had purchased at a cost of \$600,000, which in the current year had an adjusted basis of \$400,000. In the current year, he traded it to a person who was not related to him for an apartment house having a fair market value of \$500,000. The apartment house has 50 units and rents to individuals. The office building has 25 units and rents to Monty's businesses. What is Mr. Monty's recognized gain or loss on this exchange? A.\$100,000 long-term capital loss. B.\$100,000 ordinary gain. Answer (B) is incorrect.\ The transfer qualifies for like-kind exchange treatment and nonrecognition of the gain or loss. C.\$0 Answer (C) is correct.\ Section 1031(a) provides for the nonrecognition of gain or loss on the exchange of like-kind property held for productive use in a trade or business for investment. Like-kind refers to the nature or character of property (here, real property) and not to its grade or quality \[Reg. 1.1031(a)-1(b)\]. The parcels of real property are like-kind property regardless of whether they are improved, unimproved, or used for different purposes. Mr. Monty has a realized gain of \$100,000 (\$500,000 amount realized -- \$400,000 adjusted basis). However, none of this gain is recognized under Sec. 1031. D.\$100,000 long-term capital gain. === 45)Mercury owned a racetrack, including the land and improvements (track, stands, and buildings). The property was condemned when Mercury's basis in the land was \$30,000 and his basis in the improvements was \$40,000. Mercury received new land worth \$100,000 and cash of \$200,000, which he immediately used to build a track, stands, and buildings to operate a new racetrack. Mercury elected to defer as much gain as possible. What is Mercury's basis in the new racetrack? A.\$100,000 in the land and \$40,000 in the improvements. B.\$30,000 in the land and \$40,000 in the improvements. Answer (B) is correct.\ Under Sec. 1033(a)(1), no gain is recognized on an involuntary conversion when the converted property is replaced with similar property. Under Sec. 1033(b), the basis of the replacement property is the same as the basis in the converted property. Mercury's basis in the land is therefore \$30,000. Section 1033(a)(2) also provides for a taxpayer to elect nonrecognition of gain as a result of an involuntary conversion when money is received and used to replace the converted property within 2 years of the conversion. Under Sec. 1033(b), the basis of such replacement property is its purchase price less any gain not recognized. The realized gain is \$160,000 (\$200,000 cash received -- \$40,000 basis). Thus, Mercury's basis in the improvements is \$40,000 (\$200,000 -- \$160,000 gain not recognized). C.\$30,000 in the land and \$200,000 in the improvements. D.\$100,000 in the land and \$200,000 in the improvements. Answer (D) is incorrect.\ The land's basis is the same as that of the condemned land, and the improvements' basis is the property's acquisition cost less the gain not recognized. === 47)You are a calendar-year taxpayer. You were notified by the city council on December 1, Year 1, of its intention to acquire your real property used in your business by negotiation or by condemnation. On June 1, Year 2, when the property had an adjusted basis of \$40,000 to you, the city converted the property and paid you \$50,000. When does your replacement period end? A.June 1, Year 5. Answer (A) is incorrect.\ The replacement period ends 3 years after the close of the taxable year. B.June 1, Year 4. C.December 1, Year 4. D.December 31, Year 5. Answer (D) is correct.\ Section 1033(g)(4) provides that in the case of the condemnation of real property held for productive use in a trade or business or for investment, the replacement period ends 3 years after the close of the taxable year in which the gain is realized. Since the gain was realized in Year 2, the replacement period ends December 31, Year 5. === ****Useful notes:**** - Easements are related to non-depreciable land. - Gain is added to cost basis, boot is subtracted. - Furniture is expensed, not capitalized. - Insurance proceeds and Casualty Loss Recognized are considered Recovered Costs for tax purposes. - Basis of property does not include unstated interest. - Capitalized value of redeemable rent increases basis. - Betterments must be capitalized. === ****6.1 Basis and Property Transactions - Basis 50.00**** The Uniform Capitalization Rules apply to a proper share of indirect costs (including taxes) to property must be capitalized. Perhaps, marketing, selling, advertising and distribution are period costs must be expensed, not capitalized. ****6.2 Basis and Property Transactions - Adjustments to Basis 0.00**** The portion that business owners were assessed to pay the construction costs as a result of downtown business area conversion are not deductible. Special assessments must be capitalized and depreciated. ****6.3 Basis and Property Transactions  - Like-Kind Exchanges 0.00**** Gain must be recognized to the extent of boot (cash or FMV of other property) received). Loss IS NOT recognized in a like-kind exchange, even when cash is given in addition to the property. ===