Question

I own an Sports Car I use to advertise my business. • Adjusted Basis (AB) = $100,000 and Fair Market Value of $250,000 • I swap with you for your Sports Car you use to advertise your business. • Adjusted Basis (AB) = $200,000 and Fair Market Value of $250,000 • What are the tax consequences to each of us on this exchange? I am assuming that this exchange results in no gain realized or recognized or would my gain realized be 150,000. Is this assumption correct and if not can you please explain my error?

Answer 1

Calculation or recognition of gain in case of transfer on capital assets depends on the fact that whether the asset is recorded in books at fair market value or it is recorded at cost less depreciation.

In case, if the asset is recorded at book value, the capital gain to be recognised in your books will be $2,00,000 - $1,00,000 = $1,00,000. the other party will get capital loss of $ 1,00,000, Since the bookvalue of asset forgone by him is greater than the book value of asset he got. (If the asset is recorded by him at book value less depreciation)

In case the asset is recorded at fair market value, then there will not be any capital Gain/ Loss since there is no Difference in the fair value of both the assets. This will be the same applicability to both the parties if the bookas are maintained at fair market value.