A taxpayer exchanged a warehouse used in business (adjusted basis $200,000, FMV $300,000) for land to be used in business (FMV $280,000) and $20,000 cash. What is the taxpayer's recognized gain and the basis of the new land?

Answer options:

Recognized Gain: $0; Basis: $200,000

Recognized Gain: $20,000; Basis: $200,000

Recognized Gain: $20,000; Basis: $220,000

Recognized Gain: $100,000; Basis: $280,000

How to approach this question

Formula: New Basis = Old Basis - Boot Received + Gain Recognized. Gain Recognized = Lesser of Realized Gain or Boot Received.

Full Answer

B.Recognized Gain: $20,000; Basis: $200,000✓ Correct

This is a like-kind exchange under IRC §1031 (Real Property). Realized Gain = ($280k + $20k) - $200k = $100k. Boot received = $20k. Recognized Gain = Lesser of Realized ($100k) or Boot ($20k) = $20k. Basis of new land = Adjusted Basis of old ($200k) - Boot received ($20k) + Gain recognized ($20k) = $200,000.

Common mistakes

Adding the gain to the basis without subtracting the boot received.

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