3. Mary owns an apartment building that has an adjusted basis of $1,080,000 but

Question

3. Mary owns an apartment building that has an adjusted basis of $1,080,000 but subject to a mortgage of $320,000. Mary transfers the apartment building to Gary, and receives from Gary $230,000 in cash and an office building with a fair market value of $880,000 at the time of the exchange. Gary assumes the $320,000 mortgage on the apartment. The transfer is a like-kind exchange.

a) what is Mary’s realized gain/ loss?

b) what is Mary’ recognized gain/loss?

c) what is Mary’s basis of the newly acquired office building?

Explanation / Answer

a) Amount realized [$230,000 (cash) + $880,000 (office building) + $320,000 (mortgage)] = $1,430,000
Adjusted basis of apartment house given up (1,080,000)
Realized gain : 1,430,000- $1,080,000= $350,000

b) Recognized gain = $550,000 [$230,000 (cash) + $320,000 (mortgage assumed by Dave is treated as boot received);

Lower of boot received of $550,000 or realized gain of $350,000.
So there is a Postponed gain of = $200,000.

c) New basis = $680,000

[$880,000 (fair market value of office building received) ? $200,000 (postponed gain)].

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