A taxpayer exchanges a warehouse used in business (Basis $200,000, FMV $300,000) for an apartment building (FMV $280,000) and $20,000 cash. What is the realized gain, recognized gain, and basis in the new property?

Answer options:

Realized: $100,000; Recognized: $0; Basis: $200,000

Realized: $100,000; Recognized: $20,000; Basis: $200,000

Realized: $100,000; Recognized: $20,000; Basis: $220,000

Realized: $80,000; Recognized: $20,000; Basis: $180,000

How to approach this question

1. Realized Gain = Total FMV Received - Old Basis. 2. Recognized Gain = Lesser of Realized Gain or Boot Received. 3. New Basis = Old Basis - Boot Received + Gain Recognized.

Full Answer

B.Realized: $100,000; Recognized: $20,000; Basis: $200,000✓ Correct

IRC §1031. Realized Gain = $300,000 - $200,000 = $100,000. Boot received = $20,000. Recognized Gain = $20,000. New Basis = $200,000 - $20,000 + $20,000 = $200,000. Alternatively, FMV of new ($280k) - Deferred Gain ($80k) = $200,000.

Common mistakes

Recognizing full gain; calculating basis incorrectly by adding boot.

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