Question

Steve and Elaine exchange real estate investments. Steve gives up property with an adjusted basis of $250,000 (FMV $400,000). In return for this property, Steve receives property with a FMV of $300,000 (adjusted basis $200,000) and cash of $100,000. What are Steve and Elaine’s realized, recognized, and deferred gains because of the exchange?

Answer 1

Realized gain represents the benefit you receive when you sell your property. On the other hand, your recognized gain is the taxable portion of your realized gain.

Realized gain = Net sales price - Adjusted tax basis

Realized gain = ($300,000 + $100,000) - $250,000 = $150,000

Recognized gain = $100,000

Deferred gain = $50,000

Recognized gain would only be $100,000 because they would have $100,000 in boot because they acquired a property that was valued at $100,000 less than the relinquished property. The remaining $50,000 of gain would be deferred and then potentially recognized at a later date should you choose to sell your new property and take the sale proceeds in cash.