owned the property. On the other hand, Will’s gain basis is equal to Jamie’s adjusted basis for the property
(and is greater than Sam’s basis). Therefore, if the property appreciates while owned by Will, he will have
recognized gain on the sale only if the property appreciates to a fair market value in excess of Jamie’s adjusted
basis for the property.
31. Why is it generally undesirable to pass property by death when its fair market value is less than
basis?
ANSWER: Assuming the property is not personal use property (where neither the decedent nor the
beneficiary is able to deduct any of the loss), the decedent should sell the property prior to his or her death.
This allows the decedent to recognize the inherent loss on the property.
32. Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
ANSWER: One technique to avoid a wash sale result is to not purchase substantially identical stock or
securities. Another is to avoid the 60-day wash sale window.
CHAPTER 15: PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES
1. Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable
exchanges result in a change in the substance but not the form of the taxpayer’s relative economic position.
a. True
b. False
ANSWER: False
RATIONALE: Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that
nontaxable exchanges result in a change in the form but not the substance of the taxpayer’s relative economic
position.
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,2. Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will
use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.
a. True
b. False
ANSWER: False
RATIONALE: Nontaxable exchange treatment does not apply to personal use property. It applies to
investment property and trade or business property.
3. In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is
permanent.
a. True
b. False
ANSWER: True
4. In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized
gain, but receives a new basis if there is a realized loss.
a. True
b. False
ANSWER: False
RATIONALE: In a nontaxable exchange, the replacement property is assigned a carryover basis for both a
realized gain and a realized loss.
5. The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.
a. True
b. False
ANSWER: False
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,RATIONALE: The nonrecognition provisions of § 1031 likekind exchanges are mandatory for both gains and
losses.
6. Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock.
Leonore’s adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is
$350,000. Leonore’s recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.
a. True
b. False
ANSWER: False
RATIONALE: Stock held for investment purposes does not qualify for postponement treatment under § 1031.
Amount realized $ 350,000
Adjusted basis (300,000)
Realized gain $ 50,000
Recognized gain $ 50,000
Basis of Blue Heron stock $350,000
7. Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held
for over 24 months.
a. True
b. False
ANSWER: False
RATIONALE: Livestock of different sexes do not qualify as like-kind property.
8. To qualify as a like-kind exchange, real property must be exchanged either for other real property or for
personal property with a statutory life of at least 39 years.
a. True
b. False
287
, ANSWER: False
RATIONALE: Real property must be exchanged for other real property.
9. The exchange of unimproved real property located in Topeka (KS) for improved real property located in
Atlanta (GA) does not qualify as a like-kind exchange.
a. True
b. False
ANSWER: False
RATIONALE: Both properties are realty and are located in the United States.
10. Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant
who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment.
a. True
b. False
ANSWER: True
RATIONALE: Both assets are in the real estate category.
11. A building located in Virginia (used in business) exchanged for a building located in France (used in
business) cannot qualify for like-kind exchange treatment.
a. True
b. False
ANSWER: True
RATIONALE: Real property located in the United States exchanged for foreign real property does not qualify
as like-kind property.
12. Pat owns a 1965 Mustang car which he uses for personal use. He purchased it four years ago for
$22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth
$27,000. Pat’s recognized gain is $0 and his adjusted basis for the convertible is $22,000.
288
(and is greater than Sam’s basis). Therefore, if the property appreciates while owned by Will, he will have
recognized gain on the sale only if the property appreciates to a fair market value in excess of Jamie’s adjusted
basis for the property.
31. Why is it generally undesirable to pass property by death when its fair market value is less than
basis?
ANSWER: Assuming the property is not personal use property (where neither the decedent nor the
beneficiary is able to deduct any of the loss), the decedent should sell the property prior to his or her death.
This allows the decedent to recognize the inherent loss on the property.
32. Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
ANSWER: One technique to avoid a wash sale result is to not purchase substantially identical stock or
securities. Another is to avoid the 60-day wash sale window.
CHAPTER 15: PROPERTY TRANSACTIONS: NONTAXABLE EXCHANGES
1. Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable
exchanges result in a change in the substance but not the form of the taxpayer’s relative economic position.
a. True
b. False
ANSWER: False
RATIONALE: Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that
nontaxable exchanges result in a change in the form but not the substance of the taxpayer’s relative economic
position.
285
,2. Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will
use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.
a. True
b. False
ANSWER: False
RATIONALE: Nontaxable exchange treatment does not apply to personal use property. It applies to
investment property and trade or business property.
3. In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is
permanent.
a. True
b. False
ANSWER: True
4. In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized
gain, but receives a new basis if there is a realized loss.
a. True
b. False
ANSWER: False
RATIONALE: In a nontaxable exchange, the replacement property is assigned a carryover basis for both a
realized gain and a realized loss.
5. The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.
a. True
b. False
ANSWER: False
286
,RATIONALE: The nonrecognition provisions of § 1031 likekind exchanges are mandatory for both gains and
losses.
6. Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock.
Leonore’s adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is
$350,000. Leonore’s recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.
a. True
b. False
ANSWER: False
RATIONALE: Stock held for investment purposes does not qualify for postponement treatment under § 1031.
Amount realized $ 350,000
Adjusted basis (300,000)
Realized gain $ 50,000
Recognized gain $ 50,000
Basis of Blue Heron stock $350,000
7. Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held
for over 24 months.
a. True
b. False
ANSWER: False
RATIONALE: Livestock of different sexes do not qualify as like-kind property.
8. To qualify as a like-kind exchange, real property must be exchanged either for other real property or for
personal property with a statutory life of at least 39 years.
a. True
b. False
287
, ANSWER: False
RATIONALE: Real property must be exchanged for other real property.
9. The exchange of unimproved real property located in Topeka (KS) for improved real property located in
Atlanta (GA) does not qualify as a like-kind exchange.
a. True
b. False
ANSWER: False
RATIONALE: Both properties are realty and are located in the United States.
10. Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant
who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment.
a. True
b. False
ANSWER: True
RATIONALE: Both assets are in the real estate category.
11. A building located in Virginia (used in business) exchanged for a building located in France (used in
business) cannot qualify for like-kind exchange treatment.
a. True
b. False
ANSWER: True
RATIONALE: Real property located in the United States exchanged for foreign real property does not qualify
as like-kind property.
12. Pat owns a 1965 Mustang car which he uses for personal use. He purchased it four years ago for
$22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth
$27,000. Pat’s recognized gain is $0 and his adjusted basis for the convertible is $22,000.
288
