Question

Mikhail owns real estate with a basis of $400,000 and a fair market value of $650,000. He exchanges it for other real estate with a fair market value of $480,000. In addition, Mikhail is relieved of a mortgage on the old property of $200,000, assumes a mortgage on the new property of $100,000, and receives $70,000 in cash. Under Code Section 1031, what is Mikhail’s recognized gain on the exchange?

Answer 1

A gain on an exchange of similar property, considered a like-kind exchange under Section 1031, can be deferred. Gain must be recognized, however, to the extent of boot that is received. Boot includes unlike property, such as the cash of $70,000, and the relief of debt to the extent that it exceeds new debt assumed. Mikhail is being relieved of $200,000 in debt while assuming $100,000 in new debt. The difference of $100,000 is considered boot and Mikhail will recognize a gain on the exchange of :
= $100,000 + $70,000
= $170,000.

Hence the recognised gain on exchange is $170,000.