Question

For the scenario described (a. $100,000; $520,000), what is the recognized gain and basis for the land in a like-kind exchange?

A) Recognized gain: $100,000; Basis: $520,000
B) Recognized gain: $280,000; Basis: $520,000
C) Recognized gain: $100,000; Basis: $700,000
D) Recognized gain: $280,000; Basis: $700,000

Answer 1

The recognized gain is $280,000 and the basis for the land is $700,000. Option d.

Step-by-step explanation:

The correct answer is option D: Recognized gain: $280,000; Basis: $700,000.

In a like-kind exchange, also known as a Section 1031 exchange, when property is exchanged for property of a similar nature or character, the recognized gain is calculated as the difference between the fair market value of the property received and the adjusted basis of the property given up.

In this scenario, the student started with a basis of $100,000 and received property worth $520,000. Therefore, the recognized gain is $520,000 - $100,000 = $420,000. However, the basis of the new property is increased by the amount of the recognized gain, so the new basis is $100,000 + $420,000 = $520,000. Therefore, the correct answer is option D.