Magenta Corporation acquired land in a §351 exchange one year ago. The land had

Question

Magenta Corporation acquired land in a §351 exchange one year ago. The land had a basis of $320,000 and a FMV of $350,000 at the time of the transfer. Magenta has two shareholders, Mark (70%) and Megan (30%), who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. As of this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss will Magenta recognize on the sale of the land?

$0.

$21,000.

$70,000.

$30,000.

$100,000.

$0.

$21,000.

$70,000.

$30,000.

$100,000.

Explanation / Answer

SOLUTION

Magenta will recognize loss of $70,000 on the sale of the land.

Magenta Corporation would recognize the $70,000 loss ($320,000 - $250,000). The related-party loss limitation does not apply to sales. The property does not have a built-in loss on the date of the transfer to the corporation thus, the built-in loss limitation does not apply. The basis of the property to Magenta Corporation is $320,000 and, upon a sale of the property for $250,000.

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