4.0 Property Transactions (Disposition of Assets) TCP Practice Quiz

• A. Real property held for productive use in a trade or business or for investment, TCJA limited §1031 to real property only, eliminating like-kind exchange treatment for personal property
• B. Any property held for productive use in a trade or business or for investment, including personal property such as artwork, vehicles, and equipment
• C. All real and personal property used in a trade or business, but excluding investment property and property held primarily for sale
• D. Only real estate located in the United States, foreign real property does not qualify for §1031 treatment

The Tax Cuts and Jobs Act of 2017 (effective for exchanges completed on or after January 1, 2018) limited §1031 like-kind exchange treatment to real property held for productive use in a trade or business or for investment. Personal property (equipment, vehicles, aircraft, artwork, collectibles, livestock, patents) no longer qualifies for like-kind exchange nonrecognition after TCJA. The real property must be 'like-kind', any US real property is like-kind to any other US real property (farmland can be exchanged for an apartment building; a retail strip center can be exchanged for office space).

• A. $55,000 ordinary income under §1245, the entire gain is recaptured as ordinary income because the gain ($55,000) does not exceed the total depreciation allowed ($90,000)
• B. $55,000 long-term capital gain, all gain on business property held more than one year is capital gain
• C. $55,000 §1231 gain, the sale of business equipment always produces §1231 gain eligible for capital gain treatment
• D. $30,000 ordinary income (§1245 recapture up to original cost − basis) and $25,000 capital gain

§1245 recapture analysis: (1) §1245 property: equipment is §1245 property (depreciable personal property used in a trade or business); (2) Recharacterization amount: the lesser of (a) total gain recognized ($55,000) or (b) total depreciation allowed or allowable ($90,000) = $55,000; (3) Because the entire gain ($55,000) is less than accumulated depreciation ($90,000), the entire $55,000 gain is §1245 ordinary income recapture; (4) No §1231 gain remains, §1245 takes priority over §1231 by recharacterizing the gain. §1245 recapture = $55,000 ordinary income. If the equipment had been sold for $130,000 (above original cost), the analysis would be: §1245 recapture = $90,000 (all depreciation); §1231 gain = $130,000 − $120,000 = $10,000 (gain above original cost).

• A. Recognized gain: $350,000 (entire realized gain); Deferred gain: $0; Replacement basis: $480,000 (FMV)
• B. Recognized gain: $70,000; Deferred gain: $280,000; Replacement basis: $200,000
• C. Recognized gain: $0; Deferred gain: $350,000; Replacement basis: $200,000
• D. Recognized gain: $70,000; Deferred gain: $280,000; Replacement basis: $130,000

§1031 exchange calculations: (1) Amount realized = $480,000 FMV retail center + $70,000 cash = $550,000; (2) Adjusted basis of relinquished property = $200,000; (3) Realized gain = $550,000 − $200,000 = $350,000; (4) Recognized gain = lesser of boot received ($70,000) or realized gain ($350,000) = $70,000; (5) Deferred gain = $350,000 − $70,000 = $280,000; (6) Basis in replacement property (§1031(d)): FMV of replacement property − deferred gain = $480,000 − $280,000 = $200,000; alternatively: adjusted basis of relinquished property + recognized gain − boot received + boot paid = $200,000 + $70,000 − $70,000 = $200,000. The $200,000 basis preserves the $280,000 of deferred gain (which will be recognized when the retail center is later sold: $480,000 FMV − $200,000 basis = $280,000).

• A. $600,000 ordinary income under §1250, all depreciation on real property is recaptured as ordinary income
• B. $300,000 unrecaptured §1250 gain taxed at 25%; $300,000 §1231 gain taxed at the regular long-term capital gain rate (0/15/20%)
• C. $600,000 §1231 gain (long-term capital gain), real property with straight-line depreciation has no §1250 ordinary income recapture
• D. $300,000 ordinary income (§1250 recapture) and $300,000 long-term capital gain

Character analysis for real property with straight-line depreciation: (1) §1250 ordinary income recapture: $0, because the depreciation was all straight-line and there is no 'additional depreciation' (accelerated minus straight-line); (2) Unrecaptured §1250 gain (§1(h)(1)(D)): for non-corporate taxpayers, the portion of §1231 gain attributable to straight-line depreciation previously allowed is taxed at a maximum 25% rate = $300,000 (the accumulated straight-line depreciation); (3) Remaining §1231 gain: $600,000 total gain − $300,000 unrecaptured §1250 gain = $300,000; taxed at the regular long-term capital gain rate (0/15/20%); (4) Summary: $300,000 at 25% (unrecaptured §1250) + $300,000 at 0/15/20% (§1231 LTCG). Note: §1250 ordinary income recapture ($0 here) is different from 'unrecaptured §1250 gain' (which exists here at $300,000).

• A. Alice deducts $40,000 loss currently; Brian recognizes $55,000 gain ($145,000 − $90,000) when he sells to the third party
• B. Alice's $40,000 loss is disallowed under §267; Brian's basis is $90,000; Brian's gain = $145,000 − $90,000 = $55,000; Brian can use the $40,000 disallowed loss to offset his gain, recognizing only $15,000 net gain
• C. Alice's $40,000 loss is disallowed; Brian recognizes the full $55,000 gain when he sells to the third party with no ability to use Alice's disallowed loss
• D. Alice's loss is deferred (not disallowed) and flows to Brian upon his subsequent sale. Brian reduces his recognized gain by $40,000, recognizing only $15,000 gain

§267 related party loss disallowance and subsequent disposition rules: (1) Alice's loss ($40,000) is disallowed under §267(a)(1). Alice and Brian (mother/son) are related parties; (2) Brian's basis in the land = purchase price paid ($90,000). Brian receives no step-up for Alice's disallowed loss; (3) Brian's subsequent sale to unrelated buyer: Amount realized = $145,000; Adjusted basis = $90,000; Realized gain = $55,000; (4) §267(d), the previously disallowed loss can be used to reduce the related party buyer's gain on a later sale: Brian may reduce his $55,000 recognized gain by Alice's disallowed loss of $40,000; Brian's recognized gain = $55,000 − $40,000 = $15,000; (5) The §267(d) benefit to Brian: prevents the economic loss of Alice (which was real, she paid $130,000 and sold for $90,000) from being entirely wasted, allowing at least partial tax benefit when Brian sells at a true gain above Alice's original cost.

• A. Recognized gain: $220,000 (full realized gain taxable); Basis in new warehouse: $490,000
• B. Recognized gain: $0; Basis in new warehouse: $300,000 (carryover of original basis)
• C. Recognized gain: $30,000 (insurance proceeds not reinvested: $520,000 − $490,000); Basis in new warehouse: $270,000
• D. Recognized gain: $30,000; Basis in new warehouse: $300,000

§1033 involuntary conversion analysis: (1) Realized gain = Insurance proceeds ($520,000) − Adjusted basis ($300,000) = $220,000; (2) Recognized gain = Lesser of: (a) Realized gain ($220,000), or (b) Insurance proceeds NOT reinvested = $520,000 − $490,000 reinvested = $30,000; (3) Recognized gain = $30,000 (the portion of proceeds kept, not reinvested); (4) Basis in replacement warehouse = Cost of replacement property − Deferred gain = $490,000 − ($220,000 − $30,000 deferred gain) = $490,000 − $190,000 = $300,000. The $300,000 basis preserves the $190,000 deferred gain. Alternatively: Basis = Original basis ($300,000) + Recognized gain ($30,000) − Realized gain ($220,000) + Cost of replacement ($490,000) = doesn't simplify cleanly. Correct formula: Basis = Cost of replacement − Deferred gain = $490,000 − $190,000 = $300,000.

• A. $52,000 capital loss, all losses from stock sales are capital losses deductible to the extent of capital gains plus $3,000 per year
• B. $52,000 ordinary loss, §1244 allows the full loss as an ordinary deduction because the stock qualifies
• C. $50,000 ordinary loss (§1244 limitation for single filer) and $2,000 capital loss; the ordinary loss directly offsets ordinary income without limitation
• D. The loss is not deductible because losses on small business investments are always non-deductible under passive activity rules

§1244 ordinary loss treatment: (1) §1244 allows ordinary loss treatment on losses from the sale of 'section 1244 stock' (stock of a small business corporation meeting certain requirements); (2) Annual limit: for single taxpayers, the maximum §1244 ordinary loss per year is $50,000 ($100,000 for MFJ); (3) Application to $52,000 loss: first $50,000 = §1244 ordinary loss (deductible against ordinary income without limitation); remaining $2,000 = ordinary capital loss (long-term or short-term depending on holding period of the stock); (4) The ordinary loss offsets the investor's ordinary income dollar-for-dollar, providing a more valuable deduction than a capital loss (which would require gains or the $3,000 annual limitation).

• A. Boot = $100,000 cash; recognized gain = $100,000; this is a qualifying like-kind exchange with minimal gain recognition
• B. The exchange does not qualify for §1031 because the relinquished property has a mortgage that is not assumed by the other party
• C. Boot = $100,000 cash only; mortgage relief is not boot under §1031 because it is treated as a separate liability transaction outside the exchange
• D. Boot = $100,000 cash + $400,000 mortgage relief = $500,000 total boot; realized gain = $900,000 − $100,000 = $800,000; recognized gain = lesser of $500,000 boot or $800,000 realized gain = $500,000

§1031 exchange with mortgage and cash boot: (1) Amount realized = FMV of replacement property + cash received + mortgage relief = $600,000 + $100,000 + $400,000 = $1,100,000; (2) Adjusted basis = $100,000; (3) Realized gain = $1,100,000 − $100,000 = $1,000,000; (4) Boot received: cash $100,000 + mortgage relief $400,000 = $500,000 total boot. Under §1031(b), liabilities assumed by the other party (or relief of the exchanger's liabilities) constitute money received (boot); (5) Recognized gain = lesser of total boot ($500,000) or realized gain ($1,000,000) = $500,000; (6) Deferred gain = $1,000,000 − $500,000 = $500,000; (7) Basis in replacement retail center = $600,000 FMV − $500,000 deferred gain = $100,000. The investor has significant gain recognition ($500,000) despite the exchange structure because the mortgage relief alone ($400,000) creates substantial boot. To minimize boot, the investor should consider exchanging into a property with a mortgage of similar or greater value.