Question

ABC Inc. has the opportunity to sell it’s building to James Inc. for $4,300,000. The property has a basis of $1,900,000 and the buyer is willing to wait up to six months to occupy the property to allow ABC Inc. with enough time to locate and purchase a new building. ABC Inc. has a marginal tax rate of 35%.

What alternatives has ABC Inc. and what are the tax consequences of the alternatives?

Answer 1

By selling the property for cash requires recognition of gain. Gain on sale of property is 2.4 million. Tax applicable at 35% on such gain is 840,000.

Instead of selling the property the parties can engage in like-kind exchange. In a like-kind exchange of real property, property given and property received shall only be real property and can be any real property. If they do not have property to exchange then they can enter into contract with a third party who can facilitate like-kind exchange.

By doing so the property received will carry the basis of the property given, thus, not recognizing any gain.