Advanced Tax Concept 175 Complete Practice Test 2026

In the context of real estate exchanges, specifically under Section 1031 of the Internal Revenue Code, losses are not recognized in an exchange of like-kind properties. In Mateo's scenario, he is exchanging a rental house with an adjusted basis of $225,000. If he incurs a loss in this exchange, the IRS guidelines state that any loss realized on a like-kind exchange is not recognized for tax purposes.

This means that while Mateo may see a diminution in the value of the property he is giving up versus what he receives, the tax implications do not allow him to claim any loss in his accounting. Recognized loss is only allowed in transactions not qualifying for like-kind exchange treatment. Therefore, the recognized loss in this case is indeed zero, which aligns with the concept that such losses are deferred until the property is sold outside of the exchange structure. Hence, the choice indicating "none" correctly reflects the tax treatment of the loss in this transaction.