Question

Destiny has an asset (a small lot) used in her business. she exchanges it for a like-kind asset (another small lot) owned by colby. at the time of the exchange, the basis of destiny's asset was $40,000. she gave colby $20,000 cash plus the asset in exchange for his asset, which was worth $36,000. colby's basis in his original asset was $10,000. what is colby's gain or loss?

a. $20,000 gain recognized due to colby's receipt of boot.
b. $26,000 gain realized and recognized.
c. $36,000 gain recognized.
d. $0 gain recognized.

Answer 1

Colby's recognized gain from the like-kind exchange is limited to the amount of cash, or boot, he received. Therefore, despite the realized gain being $46,000, he will only recognize a gain of $20,000, which corresponds with the cash received in the transaction.

Step-by-step explanation:

The question pertains to the recognition of gain or loss on a like-kind exchange involving real property used for business purposes. When Destiny exchanges her lot with an adjusted basis of $40,000 and additional cash of $20,000 for Colby's lot, valued at $36,000 (with a basis of $10,000), Colby realizes a gain. The gain calculated is the difference between the fair market value of what he received ($56,000 which is $36,000 plus $20,000 cash) and the adjusted basis of his original asset ($10,000), resulting in a realized gain of $46,000.

However, since a like-kind exchange is generally not fully taxable and he received cash (referred to as 'boot'), the recognized gain is limited to the amount of boot received. Therefore, Colby will recognize a gain of $20,000, which is the lesser of the realized gain and the boot received. This aligns with option A: $20,000 gain recognized due to Colby's receipt of boot.