Question

Redoubt LLC exchanged an office building used in its business for a rental house. Redoubt originally purchased the building for $80,000, and it had an adjusted basis of $53,000 at the time of the exchange. The rental house had a fair market value of $62,000. Redoubt also received $7,000 of cash in the transaction. What is Redoubt's gain or loss recognized on the exchange? What is Redoubt's basis in the rental house?

Answer 1

Redoubt LLC recognizes a gain of $7,000 from the exchange. The basis in the rental house for Redoubt LLC is $108,000.

Step-by-step explanation:

In the exchange of Redoubt LLC's office building for a rental house, the recognized gain or loss and the new basis must be calculated. According to tax regulations on like-kind exchanges, the gain realized is the difference between the fair market value of the property received plus any cash received, and the adjusted basis of the property given up. In this case, Redoubt's gain realized is $(62,000 + $7,000 - $53,000) = $16,000. However, because there is boot received (the $7,000 of cash), Redoubt must recognize a gain equivalent to the lesser of the gain realized or the boot, which is $7,000.

As for Redoubt's basis in the rental house, it will be the fair market value of the rental house minus the gain recognized plus the adjusted basis of the office building given up. The new basis will be $(62,000 - $7,000 + $53,000) = $108,000. Thus Redoubt recognizes a $7,000 gain and has a $108,000 basis in the rental house.