Final answer:
In a like-kind exchange under IRC § 1031, Logan and Johnathan are deferring the recognition of gain or loss by exchanging properties of like kind for business or investment. Logan's new basis in Johnathan's land will be his original basis plus the cash received, but he must recognize gain to the extent of 'boot' received. Johnathan's basis carries over to the new property without the recognition of gain or loss since there was no boot received.
Step-by-step explanation:
When Logan and Johnathan exchange land in a transaction that qualifies as a like-kind exchange under § 1031 of the Internal Revenue Code (IRC), they are able to defer the recognition of capital gains or losses as long as the properties exchanged are used for business or investment purposes and are of like kind. In this scenario, Logan's land, with an adjusted basis of $98,000 and fair market value of $117,600, is being exchanged for Johnathan's land, which has a fair market value of $93,100. To balance the difference in value, Johnathan also provides Logan with cash of $24,500.
For Logan, the basis of the received property is generally the same as that of the property given up, adjusted for any additional money paid or received. Hence, Logan's basis in the new land would be the original basis in his land ($98,000) plus the cash received ($24,500), making the new basis $122,500. However, the cash received is viewed as “boot,” and it could trigger recognition of gain. Logan has to recognize gain to the extent of the boot received ($24,500), but any additional gain is deferred.
Johnathan, however, has no gain or loss to recognize if he doesn't receive boot, because the fair market value of the land he received is less than the value of the land he gave up, plus the cash paid.