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:

Recognized Gain: $20,000; Basis: $100,000

Recognized Gain: $0; Basis: $80,000

Recognized Gain: $100,000; Basis: $180,000

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

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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