Question

# Delta Corporation exchanges a warehouse for an office building from Gamma Corporation. Delta’s warehouse has a...

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 \$

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

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