CPA Regulation (REG) : Like Kind Exchanges

Study concepts, example questions & explanations for CPA Regulation (REG)

varsity tutors app store varsity tutors android store

Example Questions

Example Question #1 : Like Kind Exchanges

A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?

Possible Answers:

$115,000

$110,000

$190,000

$35,000

Correct answer:

$110,000

Explanation:

The taxpayer’s realized gain is $190,000 ($200,000 FMV of building + $35,000 cash + $75,000 mortgage relief - $120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the $110,000 of boot.

Example Question #2 : Like Kind Exchanges

In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:

Possible Answers:

Partnership interests

Convertible debentures

Convertible preferred stock

Rental real estate located in different states

Correct answer:

Rental real estate located in different states

Explanation:

To qualify for like-kind exchange treatment, both properties must be real property for business or investment. Only the rental real estate meets this criteria.

Example Question #3 : Like Kind Exchanges

Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus $1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize?

Possible Answers:

$10,000

$0

$3,000

$11,000

Correct answer:

$3,000

Explanation:

Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash + $2,000 debt relief - $70,000 basis in property exchanged). Total boot received is $3,000 ($1,000 cash + $2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the $3,000 of boot.

Example Question #4 : Like Kind Exchanges

In a like kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:

Possible Answers:

Rental real estate located in different states

Convertible debentures

Convertible preferred stock

Partnership interests

Correct answer:

Rental real estate located in different states

Explanation:

No taxable gain or loss will be recognized on a like kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like kind exchange.

Example Question #5 : Like Kind Exchanges

An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?

Possible Answers:

Common stock for common stock

Apartment building for unimproved land

Partnership interest for partnership interest

Manufacturing equipment for factory building

Correct answer:

Apartment building for unimproved land

Explanation:

Real property exchanged for other real property will be classified as a like kind exchange.

Example Question #6 : Like Kind Exchanges

If both assets in a like-kind exchange transaction are ________, no taxable gain or loss will be recognized.

Possible Answers:

Warrants

Interest in a legal entity

Real estate property

Convertible stock

Correct answer:

Real estate property

Explanation:

Real estate qualifies as an asset for a like-kind exchange. Thus, no taxable gain or loss will be recognized.

Learning Tools by Varsity Tutors