Question

Joe exchanged his old, personal-use car (FMV = $7000) with Betty. Joe purchased the car ten years ago for $34,800. Joe paid $200 in acquisition costs to purchase the car. In exchange, Betty gave Joe a motorcycle (FMV = $5000) plus $2000 cash. Betty originally purchased the motorcycle for $10,000. What is Joe's amount realized as a result of the exchange? What is Joe's adjusted basis in the car just prior to exchange? What is Joe's gain or loss realized on the exchange of the car? What is Betty's basis in the car immediately after the exchange?

Answer 1

Amount realized by Joe as a result of exchange will be FMV of motorcycle received from Betty as a result of exchange plus any cash payment made by Betty to Joe.

Thus, amount realized by Joe as a result of exchange = $10000+$2000 = $12000

Adjusted basis is the purchssing cost of an asset adjusted by any increase or decrease on account of any depreciation. In the present case since it is a personal asset thus , no depreciation allowable. This adjusted basis of car for Joe = $34800+$200 = $35000.

Joe gain or loss on exchange = 35000-12000 = $23000.

Betty's basis in the car immediately after exchange will be the price he paid to acquire it = $12000