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Calculate recognized and realized gain in like kind exchange

Dan in Florida wants to trade Liz in New York:
Dan's rental property is worth $350,000.
Dan's adjusted basis is $200,000.
Liz's rental property is worth $650,000 and has a $250,000 mortgage that will be assumed by Dan.
Dan will also give Liz $50,000 in cash at closing.
Liz's adjusted basis is $400,000.

What is Dan's recognized gain? What is Liz's?
What is Dan's realized gain? What is Liz's?
What is Dan's substituted basis in the New York home?

Solution Preview

First, here are a few rules about how this all works:

Section 1031 of the Internal Revenue Code allows individuals to trade like kind property and defer any gains from the property transferred to the property received. The property must be business or investment property.

The key is 'like kind'. Cash is not like kind and neither is a mortgage.

Next, remember the difference between realized and recognized. Realized is the gain that would be reported and therefore recognized, except in a like kind exchange: there is no recognition provided there is no boot (cash) or other property that is not like kind.

Dan's property: Realized gain
FMV 350,000
Basis 200,000
Gain 150,000

Liz's property: Realized gain
FMV 650,000
Basis 400,000
Gain 250,000

Dan's property: Recognized ...

Solution Summary

The 428 word solution carefully explained each scenario with calculations.