Which statement best describes rollover relief reinvestment?

Which statement best describes rollover relief reinvestment?

• A. It postpones tax on a gain until the replacement asset is disposed of
• B. It eliminates tax on all gains forever
• C. It reduces the original cost basis of the asset
• D. It exempts foreign-source gains from domestic tax

Answer: (A)

Rollover relief reinvestment postpones the tax on a gain whenever the proceeds from selling an asset are reinvested into a replacement asset used in the same trade. The gain is effectively rolled into the cost of the replacement asset, so tax is not due at the time of reinvestment but is triggered when the replacement asset is finally disposed of. This deferral also increases the base cost of the replacement asset by the rolled-over gain, shaping the amount of tax payable on the future disposal. So the best description is that it postpones tax on a gain until the replacement asset is disposed of. It does not eliminate tax forever, change the original asset’s cost basis downward, or exempt foreign-source gains.

Rollover relief reinvestment postpones the tax on a gain whenever the proceeds from selling an asset are reinvested into a replacement asset used in the same trade. The gain is effectively rolled into the cost of the replacement asset, so tax is not due at the time of reinvestment but is triggered when the replacement asset is finally disposed of. This deferral also increases the base cost of the replacement asset by the rolled-over gain, shaping the amount of tax payable on the future disposal.

So the best description is that it postpones tax on a gain until the replacement asset is disposed of. It does not eliminate tax forever, change the original asset’s cost basis downward, or exempt foreign-source gains.