Final answer:
The taxpayer has a recognized loss of $3,000, which is the difference between the amount realized ($20,000) and the adjusted basis ($23,000) in the like-kind exchange. However, typically, losses are not recognized in these types of exchanges under U.S. tax law.
Step-by-step explanation:
The taxpayer in question is engaged in a like-kind exchange, which is a non-recognition event under U.S. tax law for real property used in a business or for investment. The original cost of the real property was $35,000 with $12,000 in depreciation taken, resulting in an adjusted basis of $23,000. The property is trading for new real property worth $16,500, and the taxpayer also receives $3,500 in cash. To calculate the recognized gain or loss, we must compare the amount realized (sum of cash received and the fair market value of the property received) to the property's adjusted basis.he gain recognized by the taxpayer on this transaction can be calculated using the formula: Gain = Fair Market Value of New Property + Cash Received - Adjusted Basis of Old Property - Depreciation.
In this case, the fair market value of the new property is $16,500 and the taxpayer received $3,500 in cash. The adjusted basis of the old property is the original cost of $35,000 minus the depreciation of $12,000, which equals $23,000.Therefore, the gain recognized by the taxpayer is: Gain = $16,500 + $3,500 - $23,000 - $12,000 = $-15,000 (a loss).The amount realized is $16,500 (value of new property) + $3,500 (cash received) = $20,000. The adjusted basis is the original cost minus depreciation: $35,000 - $12,000 = $23,000. Therefore, the recognized gain is the amount realized ($20,000) minus the adjusted basis ($23,000), which equals a loss of $3,000. However, in a like-kind exchange, a loss is not typically recognized.