Question

Lindsey exchanges investment real estate parcels with Donna. Lindsay’s adjusted basis in the property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is Lindsey's basis in the new real estate?

	a.	$- 0 -
	b.	$100,000
	c.	$200,000
	d.	$400,000
	e.	$600,000

The answer is (d) $400,000. Please explain how to get this number. Thank you!

Answer 1

The correct answer as stated in the question is "D": $400,000

Derivation of the answer:

The basic concept for calculating the basis in the type of exchange as given in the question is that basis is equal to the fair market value minus any deferred gain.

Amount realized from exchange by Lindsey = $10,00,000+$200,000-$100,000 = $11,00,000

Adjusted Basis of property is $400,000 as given in the question.

Therefore, total gain = $11,00,000 - $400,000 = $700,000

Gain currently recognized (Amount of net mortgage) = $200,000 - 100,000 = $100,000

Hence deferred gain = Total gain - Gain currently recognized = $700,000 - $100,000 = $600,000

Lindsey's basis in the new real estate = FMV of property - Deferred Gain

Lindsey's basis in the new real estate = $10,00,000 - $600,000

Lindsey's basis in the new real estate = $400,000