Frances exchanges an apartment building complex, Forestview, with a fair market
ID: 2527877 • Letter: F
Question
Frances exchanges an apartment building complex, Forestview, with a fair market value of $500,000, subject to a mortgage of $200,000, for Oceanview, an apartment building complex owned by Gayle. The fair market value of Oceanview is $500,000, and it is subject to a mortgage of $250,000. Gayle also transfers $50,000 of cash to Frances. Frances’ basis in Forestview is $150,000. Gayle’s basis in Oceanview is $100,000. How much gain is realized and recognized by Frances and Gayle? What are Frances’ and Gayle’s respective bases in the property received by each?
Explanation / Answer
How much gain is realized and recognized by Frances and Gayle?
The realized gain by Frances
The amount received by frances is as under
The amount given up by Frances
Realized gain = $500,000 +$50,000-$50,000-$150,000
=$350,000
Recognized gain = cash received + net debt relief
=$50,000 - $50,000
=$0
The realized gain by Gayles
The amount received by Gayles is as under
The amount given up by Frances
Realized gain = $500,000 +$50,000-$100,000
=$450,000
Recognized gain = net debt relief or realized gain whichever is less
=$50,000 net debt relief
=$50,000
What are Frances’ and Gayle’s respective bases in the property received by each?
The substitute basis of acquired property. The formula is given below
Substitute basis of acquired property = Fair market value of property received – (realized gain – recognized property)
Calculation of Substitute basis of acquired property for Frances
= Fair market value of property received – (realized gain – recognized property)
= $500,000 –($350,000-$0)
=$150,000
The Substitute basis of acquired property for Frances is $150,000
Substitute basis of acquired property for Gayle’s
= Fair market value of property received – (realized gain – recognized property)
= $500,000 –($450,000-$50,000)
=$$500,000-$400,000
=$100,000
The Substitute basis of acquired property for Gayle’s is $100,000
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