Question

Bob owned a duplex used as rental property. The duplex had an adjusted basis to Bob of $86,000 and a fair market value of $300,000. Bob transferred the duplex to his brother, Carl, in exchange for a triplex that Carl owned. The triplex had an adjusted basis to Carl of $279,000 and a fair market value of $300,000. Two months after the exchange, Carl sold the duplex to his business associate to whom he was not related for $312,000.

a) How much, if any, gain or loss did Carl recognize with respect to the sale by Carl to his business associate?

b) what is Bob’s basis in the triplex?

c) If Carl sold the duplex to the business associate two years after the exchange with Bob. Without taking into consideration any changes to the adjusted basis of the property subsequent to the exchange with Bob (such as for depreciation), how much, if any, gain or loss did Bob recognize with respect to the exchange with Carl?

d) If Carl sold the duplex to his business associate three years after the exchange with Bob. Without taking into consideration any changes to the adjusted basis of the property subsequent to the exchange with Bob (such as for depreciation), how much, if any, is Carl’s recognized gain with respect to these transactions?

Answer 1

Here first we need to know the basis (the value at which both the parties would record the property in their books of accounts). It will be the fair value at which both the properties are exchanged. Here it will be as follows

Bob will record the triplex at $ 300,000 and Carl will record the duplex at $ 300,000

Now we answer each of the question

(a) Carl sells the duplex at $ 312,000 and his carrying value is 300,000 so this results into a gain of $ 12,000 ( 312,000 - 300,000)

(b) Bob's basis in the triplex is the carrying amount at which it is recored in the books i.e. fair value it is $ 300,000

(c) The gain recognized by Bob on exchange is 300,000 - 86,000 = 214,000

(d) Carl will have the same gain i.e. $ 12,000