Question

Chelsea owns 200 acres of farmland is southeastern Kentucky. Her adjusted basis for the land is $525,000, and there is a $390,000 mortgage on the land. She exchanges the land for an office building owned by Norbert in Albany, New York. The building has a fair market value of $450,000. Norbert assumes Chelsea's mortgage on the land. What is the amount of Chelsea's recognized gain or loss on the exchange? a.$390,000 b.$315,000 c.$0 d.$840,000 e.$525,000

b.$315,000 Amount realized: Office building (FMV)$450,000 Mortgage on land390,000 $840,000 Adjusted basis(525,000) Realized gain$315,000 Recognized gain$315,000 The mortgage is treated as boot. The recognized gain is the lesser of the realized gain ($315,000) or the boot received of $390,000.

Answer 1

Chelsea's recognized gain on exchanging her farmland for Norbert's office building is $315,000. The amount realized from the exchange is $840,000, and after subtracting Chelsea's adjusted basis of $525,000, the realized gain is $315,000, which is considered the recognized gain as it's less than the boot received.

Step-by-step explanation:

The question pertains to a like-kind exchange in tax accounting, specifically dealing with the recognition of gain or loss on the exchange of property. When Chelsea exchanges her farmland for Norbert's office building, the transaction involves several calculations.

First, we ascertain the amount realized from the exchange, which comprises the fair market value (FMV) of the office building received ($450,000) plus the mortgage assumed by Norbert ($390,000), totaling $840,000.

Next, we subtract Chelsea's adjusted basis in the farmland, which is $525,000, from the amount realized to determine the realized gain.

The calculation is as follows: $840,000 (amount realized) - $525,000 (adjusted basis) = $315,000 (realized gain).

In this exchange, because the mortgage is considered as boot, which is property received in a like-kind exchange that is not like-kind, it triggers the recognition of gain. The recognized gain is the lesser of the realized gain or the boot received. In Chelsea's case, the recognized gain is $315,000, since this is less than the boot received of $390,000.

Therefore, the amount of Chelsea's recognized gain on the exchange is $315,000.