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Tax Implications of a Like-kind Exchange

Kevin exchanges an office building used in business for one owned by Charlene. The FMV of Kevin's building is $280,000 (basis $150,000) and it is subject to a mortgage of $50,000, which is assumed by Charlene. Kevin receives $30,000 cash and Charlene's office building, which has a FMV of $200,000 (basis of $180,000).
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?

Solution Preview

a. What is the amount of gain realized by Kevin?

IRC section 1011(a) states that "The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized." IRC section 1011(b) states that "The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." Therefore, Kevin's gain realized is computed as follows:

Mortgage debt assumed by Charlene $ 50,000
Cash received from Charlene 30,000
Fair market value of Charlene's building 200,000
Total amount realized by Kevin $280,000 ...

Solution Summary

This solution cites authoritative sources and discusses the tax implications of a like-kind exchange.

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