Question

Dean exchanges a business storage facility with a $120,000 adjusted basis for $40,000 cash and a parking lot with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange

Answer 1

$40,000

Step-by-step explanation:

This transaction lacks commercial substance, therefore, Dean should only recognize the boot (cash received) as gain from this transaction. The adjusted basis for Dean's "new" parking lot is $120,000, the same adjusted basis as the business storage facility.

This happens because the boot was not more than 25% of the value of the total consideration received by Dean (cash + parking lot). If the boot is 25% or more, then the sale must be reported as a cash sale.