Final answer:
In a direct conversion like a like-kind exchange, the adjusted basis of the property received is typically the same as the taxpayer's basis in the property given up. The correct response is that this basis is not adjusted by the market value or the deferred gain.
Step-by-step explanation:
When involved in a direct conversion or a like-kind exchange under Internal Revenue Code Section 1031, a taxpayer has the opportunity to defer the recognition of capital gains or losses upon the exchange of property for like-kind property. The key to such an exchange is that it must be for investment or business purposes, not for personal use. According to IRS rules, when a taxpayer defers the gain, the adjusted basis in the new property received is generally the same as the basis in the property given up, adjusted for any additional money or property included in the transaction.
Regarding the options provided:
Market value of the property plus the deferred gain: This is incorrect because the basis is not typically calculated based on the market value in a like-kind exchange.
Market value of the property: This is incorrect as well for the same reason as above.
Taxpayer's basis in the property involuntarily converted: This option aligns most closely with the IRS rules regarding a like-kind exchange. The basis of the new property is generally the same as the basis of the property that was exchanged.
Taxpayer's basis in the property involuntarily converted plus the deferred gain: This option wrongly suggests adding the deferred gain to the basis.
Therefore, the correct answer is the basis of the property received in a direct conversion is equal to the taxpayer's basis in the property involuntarily converted.