Question

Firm ML, a non-corporate taxpayer, exchanged residential rental property plus $15,000 cash for 20 acres of investment land with a $200,000 FMV. ML used the straight-line method to compute depreciation on the rental property.

a. Assuming that ML's exchange was negotiated at arm's length, what is the FMV of the rental property?
b. If the adjusted basis of the rental property is $158,000, compute ML's realized and recognized gain. What is the character of the recognized gain?
c. Compute ML's basis in the 20 acres of investment land.

Answer 1

A) $215,000

B) realized gain = $57,000

recognized gain = $15,000

C) $158,000

Step-by-step explanation:

cash exchanged with the rental property ( boot ) = $15,00

A) Assuming ML's exchange is done at arm's length

FMV of property = $200,000 + $15,000 = $215,000

B) Taking adjusted basis of rental property = $158,000

ML's realized gain = FMV of property at arm's length - adjusted basis

= $215000 - $158000 = $57,000

ML's recognized gain = $15,000

The character of the recognized gain is that it will be lower of the boot amount or realized gain and this is because no gain or loss is registered/recognized in the transaction ( exchange ) except with the boot received

C) Determine ML's basis in the 20 acres of investment land

= $158,000