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Property transactions: Nontaxable exchanges

Sarah owns undeveloped land (basis of $350K) held as an investment. On October 7, 2006, she exchanges the land with her 27-year-old daughter, Ellen for other undeveloped land also to be held as an investment. The appraised value of Ellen's land is $500K.

a. On February 15, 2007, Sarah sells the land to Jeff, a real estate broker, for $600K. Calculate Sarah's realized and recognized gain or loss from the exchange with Ellen and on the subsequent sale of the land to Jeff.

My answer is .......
Sarah's realized and recognized gain is $250,000 from the exchange with Ellen and on the subsequent sale of the land to Jeff.
Is that right?

b. Calculate Sarah's realized and recognized gain or loss on the exchange with Ellen if Sarah does not sell the land. Instead, on February 15, 2007, Ellen sells the land received from Sarah. Calculate Sarah's basis for the land on Octover 7, 2006, and on February 15, 2007.

My answer is .....
Sarah's realized gain is $150,000 and her recognized gain is $0 from the exchange with Ellen.
Sarah's bases for the land on October 7 and on February 15 are both $350,000.
Am I correct?

Solution Preview

a. Your answer is correct because of the two year rule for sale of property after a like kind exchange with a related person. Had the first ...

Solution Summary

The solution discusses the answers provided in the problem and gives the rationale to support the answers for nontaxable exchanges under Sec 1031.

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