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Metro Corp. traded machine A for machine B. Metro originally purchased machine A for $50,000 and...

Metro Corp. traded machine A for machine B. Metro originally purchased machine A for $50,000 and machine A's adjusted basis was $25, 000 at the time of the exchange. The fair market value of machine A is $44,000 and Metro trades machine A for machine B valued at $40,000 and $4,000 cash. Machine A and machine B are like-kind property. The exchange qualifies as a like-kind exchange. What is Metro's recognized gain or loss?

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Answer #1

As per IRC code 1031, gain on exchange of qualified like-kind properties can be deferred.

Since in the question, it is given that Machine A and Machine B are like-kind, as well machine is a business property of Metro Corp. it is a qualified property as per the provision.

Realised profit/loss will be

Adjusted value of the relinquishing asset - (Value of gaining asset + Cash received) = 25000 - (40000 + 4000) = $ 19000 profit

The realised profit is $ 19000. Now, since Machine A and Machine B are like kind assets, realised gain upto the value of 'asset gained' excceding over adjusted basis value of 'relinquished asset' will only be defferred and the remaining gain arising due to receipt of cash will be recognized gain.

So recognized gain will be the amount received in cash, i.e., $4000.

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