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Terence, an individual, purchased some property in Sacramento, California, for $225,000 approximately 5 years ago. Terence exchanges his a parcel of land in Sacramento for another piece of land in Folsom, Califonria.

What is Terence’s realized gain or loss, recognized gain or loss, and basis in the Folsom property in each of the following alternative scenarios? (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

b. The transaction qualifies as a like-kind exchange and the fair market value of each property is $156,000.

     

Answer 1

A like - kind exchange of property creates realised loss and recognized loss at different times .

When exchanging the property in Sacramento at a price lower than the purchase price with the property in Folsom ( exchange with a less valuable property ) , Terence inccured a realised loss of $69000 ( 225000- 156000) immediately. However there is no recognized loss at this moment . Terrence will only be able to deduct this loss for tax purposes when he sells the new property . Therefore loss will be recognized at a later date when the new property will be sold .