Question

In June 2019, Sue exchanges a sport utility vehicle (adjusted basis of $16,000; fair market value of $19,500) for cash of $2,000 and a pickup truck (fair market value of $17,500). Both vehicles are for business use. Sue believes that her basis for the truck is $17,500. Is Sue correct? Why or why not?

Answer 1

Solution:

Sue is not correct because adjusted basis she considered is not correct.

Actually basis should be $ 16,000. [ Explained below]

Explanation:

1) Section 1031 deals with non taxable exchanges of like-kind property.

2) Here in this question, sport utility vehicle and pick up truck comes under general purpose trucks. So, we can apply section 1031 here.

3) Adjusted basis as per section 1031 = Fair Market Value of Property taken[pickup truck] - Postponed gain.

Adjusted basis as per section 1031 = $ 17,500 - $1,500 = $ 16,000

4) Fair Market Value of Property taken is FMV of pick up truck i.e., $ 17,500.

5) Postponed Gain = Differences between fair market value and adjusted basis of property minus cash received in exchange

Postponed Gain = ($ 19,500 - $ 16,000) - $ 2,000 = $ 1,500.

6) As Sue taken basis as $ 17,500 instead of $ 16,000, she is not correct.