Question

Rufus Inc. and Hardy Company are negotiating a nontaxable exchange of business properties. Rufus’s property has a $50,000 tax basis and a $77,500 FMV. Hardy’s property has a $60,000 tax basis and a $90,000 FMV.

A. Which party to the exchange must pay boot to make the exchange work? How much boot must be paid?

B. Assuming the boot payment is made, how much gain or loss will Rufus realize and recognize on the exchange, and what tax basis will Rufus take in the property acquired?

C. Assuming the boot payment is made, how much gain or loss will Hardy realize and recognize on the exchange and what tax basis will Hardy take in the property acquired?

Answer 1

Solution:

A)

Rufus must pay $12,500 boot in addition to transferring property with a $77,500 FMV. The Total amount transferred to Hardy must be $90,000 , which is the FMV of the property Hardy tarnsfers to Rufus.

B)

Rufus realize a $27,500 gain($90,000 amount realized -[$50,000 tax basis of transferred property + $12,500 boot paid]). Rufus recognizws no gain because it did not received bbot. Its basis in the property acquired is $62,500 ($50,000 substitued basis of property transferred + $12,500 boot).

C)

Hardy realizes a $30,000 gain ($90,000 amount realized [$77,500 FMV of property acquired +$12,500 boot received] - $60,000 tax basis of transferred property). Rufus recognizes $12,500 gain equal to the boot received.Its basis in the property acquired is $60,000 (substituted basis of property transferred).

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