Question

Company B and Firm W exchanged the following business real estate:

	Blackacre (exchanged by B)				Whiteacre (exchanged by W)
FMV	$	482,000			$	612,000
Mortgage		(120,500	)			(250,500	)
Equity	$	361,500			$	361,500

1. If B’s adjusted basis in Blackacre was $289,200, compute B’s realized gain, recognized gain, and basis in Whiteacre.
2. If W's adjusted basis in Whiteacre was $122,400, compute W’s realized gain, recognized gain, and basis in Blackacre.

Answer 1

SOLUTION

a.         B’s realized gain is $192,800 ($612,000 amount realized – $419,200 adjusted basis [$289,200 adjusted basis in Blackacre + $130,000 (* 250,500-120,500) net debt assumption]). It recognizes no gain and takes a $365,000 basis in Whiteacre.

b.         W’s realized gain is $491,500 ($612,000 amount realized [$482,000 FMV of Blackacre + $130,000 net relief of debt] – $120,500 adjusted basis). It must recognize $130,000 of the gain because of the receipt of $130,000 boot (net debt relief). Its tax basis in Blackacre is $120,500.