ExpertMedium1 markMultiple Choice
CPA · Question 23 · Area IV: 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: $0; New Basis: $80,000
B.
Recognized Gain: $20,000; New Basis: $120,000
C.
Recognized Gain: $20,000; New Basis: $100,000
D.
Recognized Gain: $100,000; New Basis: $180,000
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) + Recognized ($20k) = $100k.
Full Answer
C.Recognized Gain: $20,000; New Basis: $100,000✓ Correct
Recognized Gain: $20,000; New Basis: $100,000
IRC §1031(b) requires recognition of gain to the extent of boot (cash) received. Basis formula (IRC §1031(d)): Adjusted Basis of old property - Money received + Gain recognized. $100,000 - $20,000 + $20,000 = $100,000.
Common mistakes
Recognizing the full realized gain or calculating basis as simply FMV - Deferred Gain (which also works: $180k - $80k deferred = $100k).
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