Question

Sandy owns a building which she uses in her manufacturing business with an adjusted basis of $375,000 and a $800,000 fair market value. She exchanges her building with a building owned by Mitch. Mitch's building has a $1,050,000 fair market value and is subject to a mortgage of $250,000 which Sandy assumes as part of the transaction. Calculate Sandy's: (1) realized gain, (2) recognized gain, & (3) basis for the building received.

Answer 1

1)Realized gain = (Fair market value ofasset acquired-mortgage on property -adjusted basis of asset given up

                    = [1,050,000 - 250,000] - 375,000

                     = 800,000 -375,000

                     = $ 425,000

2) Recognised gain = 0 since the fair market value of asset given equal fair market value of asset acquired.

3)Basis of building received : $ 1,050,000