Cynthia owns Rental Property 1 (FMV = $300,000, AB = $250,000). Rental Property
ID: 2577292 • Letter: C
Question
Cynthia owns Rental Property 1 (FMV = $300,000, AB = $250,000). Rental Property 1 is subject to a $100,000 loan. Cynthia exchanges Rental Property 1 with Dan for Rental Property 2 (FMV = $200,000 ; AB = $400,000 ). Dan also assumes the $100,000 loan on Rental Property 1.
20. What is Cynthia’s recognized gain or loss on the exchange? Note: you should calculate realized gain/loss first, but the question asks only for recognized gain/loss.
21. What is Cynthia’s basis in Rental Property 2?
Note: make sure you understand what Dan’s basis in Rental Property 1 is after the exchange
Explanation / Answer
Basis
Each house is a separate transaction. The rule about rolling over the gain from the first house ended back in May 1997. Cost basis is the purchase price plus improvements if any so in the present case basis for the new house is $200,000.
Recognized Gain
The IRS considers a recognized gain a profit earned from the sale of an asset. A recognized gain only considers the difference between the basis of the asset and the sale price. The IRS allows you to make a tax-free profit of $250,000 on a primary residence, or $500,000 if you are married and file jointly. So in the present case Since Realized gain is $50,000 which is <250,000 So recognized gain is ZERO.
Realized Gain
Realized gains refer to the amount of money you actually earned in the sale of an asset. When calculating your realized gain, you must deduct any costs associated with the sale. So in the present case realized gain is $50,000 which is calculated as follows.
Sales Price
300,000
AB
250,000
250,000
Realized Gain
50,000
Bases of new house
200,000
Sales Price
300,000
AB
250,000
250,000
Realized Gain
50,000
Bases of new house
200,000
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