FEDERAL INCOME TAXATION 1. CHAPTER 12 #62 Karen Klaushas a machine (section 1245

Question

FEDERAL INCOME TAXATION 1. CHAPTER 12 #62

Karen Klaushas a machine (section 1245 property) with an adjusted basis of $4,000 and a fair market value of $16,000. the machine originally cost $17,000 when purchased in 2013. In 2017, she exchanged it for another machine with fair market value of $12,000 and recieved $4,000 cash.

a. What are the tax consequences of the exchange for Karen?

b. What would the tax consequences be if the new machine had a fair market value of $16,000 and no cash was recieved?

Explanation / Answer

a. Tax consequences:

b. When no cash received:

Realised gain calculation: Amount realised: FMV of property received 12000 Cash received 4000 A Amount realised 16000 Less: B Adjusted basis of property given up 4000 C=A-B Gain realised 12000 Gain recognised: Gain realised 12000 Cash received 4000 Lesser of above 4000 Hence gain realised, Lesser of gain realised, cash received is 4000 Gain deferred 8000 Basis of property received: FMV of property received 12000 less: gain deferred 8000 Basis of property received 4000

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