Armando owns a pizza parlor. Because his business is declining, he trades his ol

Question

Armando owns a pizza parlor. Because his business is declining, he trades his old pizza oven in on a smaller oven that is worth $12,000. The old oven cost $30,000 and has an adjusted basis of $18,000. Because Armando’s oven is worth $15,000, he agrees to take the $3,000 difference in olive oil and pepperoni.

a. What is Armando’s realized gain or loss on the old oven?

b. How much of the realized gain or loss is recognized on the exchange?

c. What is the character of the recognized gain or loss?

d. How much of the realized gain or loss is deferred?

e. What is the basis of the new oven?

Explanation / Answer

a Armando receives $15,000 for his old oven ($12,000 value of new oven + $3,000 value of olive oil and pepperoni received) resulting in a $3,000 realized loss: Amount realized ($12,000 + $3,000) =$15000 Adjusted basis (18,000 ) Realized loss $ (3,000) b Although the $3,000 of olive oil and pepperoni is considered boot, a loss in a like-kind exchange is never recognized -- even if boot is received. Therefore, the $3,000 loss is deferred c Because the oven is used in Armando’s trade or business, if the $3,000 loss was recognized it would be a Section 1231 loss. d The $3,000 loss is deferred. Because the loss is not recognized, it does not have to be characterized. e The basis of the oven is $30,000, Add loss deferred 3000 new basis 33000

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