Hillcrest Corporation, a calendar year C corporation, owned a parcel of farmland
ID: 2449592 • Letter: H
Question
Hillcrest Corporation, a calendar year C corporation, owned a parcel of farmland which it used to raise crops for sale to local grocery stores. The farmland had been purchased eight years ago for $700,000. The land was condemned by the State of Minnesota to expand a two-lane county highway to four lanes. On July 1, 2015, the State of Minnesota paid Hillcrest Corporation $1,000,000 for the farmland. Assume the condemnation was an involuntary conversion under IRC Section 1033. a. What is the latest date that Hillcrest Corporation may reinvest in qualifying replacement property to defer recognition of gain as a result of the involuntary conversion? (1 point) b. Under the circumstances, what type of property would be considered qualifying replacement property for Hillcrest? (1 point) c. Assume that in 2016 Hillcrest Corporation downsized its farming operations and purchased a new parcel of farmland for $500,000. What is the amount of Hillcrest’s realized gain, the amount and character of its recognized gain, and its basis in the new parcel of farmland. Please show your work and explain your calculations. (3 points)
Explanation / Answer
Date of acquisition: 01/07/2015
Compensation : 1,000 000
INVOLUNTARY CONVERSION: It is invuluntary conversion defined under condemnation: " government or semi government leaglly take over private properties for public use without cocent but paying compensation"
a) Latest date for reinvestment to defer recognition of gain: Three years after the close of the first tax year in which any part of the conversion gain is realised. ie two years from 31.12.2015
To be reinvested on or brfore 31.12.2018
b) Qualifying replacement property : The similiar property. Ie the same type of property converted. Hillcrest should by Farmland "any other property used for farming purpose"
c) Cost of reinvestment : $ 700,000
Compensation $ 1,000,000
Total gain (1,000,000 - 700 000) = 300,000
Recognised gain: since reinvestment is less than the basis of original propert recognise 300,000 as gain
Since holding period is eightb years it is Long term capilta gain
Basis of new land: Basis of old property less money received not expended plus any gain recognised:
700,000 - 500,000+ 300,000 = 500,000
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