CES Boot and Gain Recognition 3

Question 1

A taxpayer's realized gain is zero (no economic gain), yet the taxpayer receives $30,000 in cash boot. How much gain is recognized?

Accepted Answer

$0, because recognized gain cannot exceed realized gain

Answer

Recognized gain is limited to the lesser of boot received or realized gain; since realized gain is $0, no gain is recognized even though boot was received.

Question 2

Which of the following best describes the 'net boot' concept used in gain recognition calculations?

Accepted Answer

Boot received minus allowable exchange expenses and any boot paid by the taxpayer

Answer

Net boot is computed by reducing gross boot received by exchange expenses paid and any boot the taxpayer contributes, yielding the net amount subject to gain recognition.

Question 3

A taxpayer sells a property with an adjusted basis of $100,000 for $400,000 (no debt) and acquires replacement property worth $350,000. Ignoring selling costs, what is the recognized gain?

Accepted Answer

$50,000

Answer

Realized gain is $300,000; the $50,000 shortfall in reinvestment equals the boot received; recognized gain is the lesser of $50,000 or $300,000, which is $50,000.

Question 4

How does the recognition of gain on boot received affect the basis of the replacement property?

Accepted Answer

The basis is adjusted upward by the amount of gain recognized on the boot, reducing deferred gain

Answer

Gain recognized on boot reduces the amount of deferred gain, so the replacement property's basis is stepped up by the recognized gain, partially restoring basis.

Question 5

A taxpayer sells unencumbered property for $600,000 (adjusted basis $200,000) and acquires replacement property worth $600,000 by assuming a $200,000 mortgage and using $400,000 in exchange funds. What is the recognized gain?

Accepted Answer

$0, because full value was reinvested with no cash back

Answer

All $600,000 in proceeds were fully reinvested (via $400,000 exchange funds plus $200,000 in assumed debt), no boot was received, and therefore no gain is recognized.

CES - Certified Exchange Specialist Practice Test

CES - Certified Exchange Specialist Practice Test

CES Boot and Gain Recognition 3