Question

Bobbie exchanges farmland (adjusted basis 160,000) for other farmland that has a FMV of140,000. What is the gain or loss on the exchange?

1) Gain of $20,000
2) Loss of $20,000
3) No gain or loss
4) Cannot be determined

Answer 1

In theory, without considering IRS rules, the exchange results in a loss of $20,000. However, under IRS Section 1031 like-kind exchange rules, typically no gain or loss is recognized on the exchange of similar properties used for business or investment.

Step-by-step explanation:

The question deals with tax implications of exchanging properties and whether there would be a gain or loss recognized in such a transaction. Since Bobbie exchanges farmland with an adjusted basis of $160,000 for other farmland that has a fair market value (FMV) of $140,000, the gain or loss would be calculated by subtracting the basis from the fair market value of the property received. However, under IRC Section 1031, a like-kind exchange generally results in no gain or loss being recognized, provided both properties are held for productive use in a trade or business or for investment and meet other requirements for a like-kind exchange. In this strictly theoretical scenario, if Section 1031 did not apply, a loss of $20,000 would be realized (FMV of property received $140,000 - adjusted basis of property given up $160,000), but it is important to consult with a tax professional for specific cases as like-kind exchanges can have complex qualifications.