Question

Delta Corporation exchanges a warehouse for an office building from Gamma Corporation. Delta’s warehouse has a fair market value of $4,000,000 and a basis of $2,250,000. The office building has a fair market value of $3,750,000, so Delta received $250,000 cash from Gamma to complete the exchange.

What are Delta’s realized and recognized gain or loss on the exchange?

Realized gain or loss:

Recognized gain or loss:

What is its deferred gain or loss?

Deferred gain of $

What is its basis in the building acquired?

Basis of $

How would your answers change if Delta’s basis in the warehouse was $3,900,000?

Realized gain or loss:

Recognized gain or loss:

Deferred gain of $

Basis of $

How would your answers change if its basis in the warehouse was $4,150,000?

Realized gain or loss:

Recognized gain or loss:

Deferred gain of $

Basis of $

Answer 1

Solution:

Realized gain = $4,000,000 - 2,250,000 = $1,750,000

Recognized gain = $250,000 ( i.e. cash received)

Deferred gain = $1,750,000- 250,000 = $1,500,000

Basis in building = $3,750,000(FMV) - 1,500,000(Deferred gain) = $2,250,000

Scenario 2. If basis in warehouse is $3,900,000 ;

Realized gain = FMV - Basis (but the difference can't exceeds cash received)

= $4,000,000 - 3,900,000 = $100,000

Recognized gain = $100,000

Deferred gain = $0

Basis in building = $3,750,000

Scenario 3. If the basis in warehouse is $4,150,000 ;

Realized loss= $4,000,000 - $4,150,000 = $150,000

Recognized loss= $0

Deferred loss = $150,000

Basis in building = $3,750,000+150,000 = $3,900,000