ExpertHard1 markMultiple Choice
CPA · Question 52 · Area III: Property Transactions
A taxpayer exchanges a business building (Adjusted Basis $100,000, FMV $200,000) for a new business building (FMV $180,000) and $20,000 cash. What is the recognized gain and the basis of the new building?
A taxpayer exchanges a business building (Adjusted Basis $100,000, FMV $200,000) for a new business building (FMV $180,000) and $20,000 cash. What is the recognized gain and the basis of the new building?
Answer options:
A.
Recognized Gain: $20,000; Basis: $100,000
B.
Recognized Gain: $0; Basis: $80,000
C.
Recognized Gain: $100,000; Basis: $180,000
D.
Recognized Gain: $20,000; Basis: $120,000
How to approach this question
1. Realized Gain = Total FMV Received ($200k) - Old Basis ($100k) = $100k. 2. Recognized Gain = Lesser of Realized ($100k) or Boot ($20k) = $20k. 3. New Basis = Old Basis ($100k) - Boot ($20k) + Gain ($20k) = $100k.
Full Answer
A.Recognized Gain: $20,000; Basis: $100,000✓ Correct
A
IRC §1031 Like-Kind Exchange. Realized gain = $100,000. Boot received = $20,000. Recognized gain is limited to boot received ($20,000). Basis of new property = Adjusted Basis of old ($100,000) - Boot received ($20,000) + Gain recognized ($20,000) = $100,000.
Common mistakes
Forgetting to subtract the boot received when calculating the new basis.
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