Question

On October 1, Shelly exchanged an apartment building (adjusted basis of $775,000, fair market value of $850,000) for another apartment building owned by Brian (fair market value of $575,000 and subject to an assumable mortgage of 225,000) and $50,000 cash. The property transfers were made subject to the outstanding mortgage.

What is Shelly's realized gain, recognized gain, and new basis?

Answer 1

Realised gain = total compensation- cost basis(or adjusted basis)
=575,000+225,000+50,000-775,000
=75,000.

Recognized Gain= gain from the appreciation of asset,i.e; difference between the cost price and selling price of an asset. ( sort of capital gain)
=850,000( fair value of the property)- 775,000( adjusted basis)
=75,000
NEW Basis= 850,000( the new cost of acquisition , becomes the basis for any further calculation)

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