CES Tax Implications & Benefits 2 — Questions and Answers
Question 1: Which IRS form is used by a taxpayer to report a like-kind exchange?
- Form 4797
- Form 8824 (Correct answer)
- Form 1099-S
- Schedule D
Correct answer: Form 8824
Form 8824 (Like-Kind Exchanges) is filed with the taxpayer's return to report a 1031 exchange.
Question 2: How does receiving cash boot affect the tax outcome of a 1031 exchange?
- It disqualifies the entire exchange
- It is taxable to the extent of the taxpayer's realized gain (Correct answer)
- It reduces the taxpayer's basis in the replacement property only
- It has no effect if the exchange is otherwise valid
Correct answer: It is taxable to the extent of the taxpayer's realized gain
Boot received is recognized (taxable) gain to the extent of the taxpayer's realized gain but does not disqualify the entire exchange.
Question 3: What is 'realized gain' in the context of a 1031 exchange?
- The amount of depreciation taken on the relinquished property
- The difference between the amount realized on the sale and the adjusted basis of the relinquished property (Correct answer)
- The fair market value of the replacement property
- The capital gain tax owed on the transaction
Correct answer: The difference between the amount realized on the sale and the adjusted basis of the relinquished property
Realized gain is computed as the amount realized minus the adjusted basis of the relinquished property.
Question 4: A taxpayer has an adjusted basis of $200,000 in the relinquished property and sells it for $500,000. What is the realized gain?
- $200,000
- $300,000 (Correct answer)
- $500,000
- $700,000
Correct answer: $300,000
Realized gain = $500,000 (amount realized) − $200,000 (adjusted basis) = $300,000.
Question 5: If a taxpayer exchanges into a replacement property of lesser value and receives $50,000 in cash, which portion is taxable?
- The full $50,000 regardless of realized gain
- The lesser of the boot received ($50,000) or the realized gain (Correct answer)
- Nothing — the exchange defers all tax
- Only 50% of the $50,000
Correct answer: The lesser of the boot received ($50,000) or the realized gain
The recognized gain is the lesser of the boot received or the total realized gain on the transaction.
Question 6: What impact does a 1031 exchange have on the taxpayer's future depreciation deductions?
- Depreciation restarts fresh at the replacement property's full purchase price
- Depreciation continues based on the carryover adjusted basis, which is lower than fair market value (Correct answer)
- Depreciation is suspended during the exchange period
- Depreciation is eliminated on the replacement property for 5 years
Correct answer: Depreciation continues based on the carryover adjusted basis, which is lower than fair market value
Because the basis carries over (substituted basis), the depreciation deductions on the replacement property are based on a lower adjusted basis than the current fair market value.
CES Tax Implications & Benefits 2
Which IRS form is used by a taxpayer to report a like-kind exchange?