Mary owns an apartment building that has an adjusted basis of $1,080,000 but subject to a mortgage of $320,000. Mary transfers the apartment building to Gary, and receives from Gary $230,000 in cash and an office building with a fair market value of $880,000 at the time of the exchange. Gary assumes the $320,000 mortgage on the apartment. The transfer is a like-kind exchange.

a) what is Mary’s realized gain/ loss?

b) what is Mary’ recognized gain/loss?

c) what is Mary’s basis of the newly acquired office building?

a). Mary’s realized gain is $350,000

b). Mary’ recognized gain is $200,000

c). Mary’s basis of the newly acquired office building is $680,000

Explanation:

a) In order to calculate Mary’s realized gain/ loss we would have to make the following calculation:

Amount realized= [$230,000 (cash) + $880,000 (office building) + $320,000 (mortgage)] = $1,430,000

Adjusted basis of apartment house given up (1,080,000)

herefore, Realized gain = 1,430,000- $1,080,000= $350,000

b) In order to calculate Mary’ recognized gain/loss we would have to make the following calculation:

b) Recognized gain = $550,000 [$230,000 (cash) + $320,000 (mortgage assumed by Dave is treated as boot received);

Lower of boot received of $550,000 or realized gain of $350,000.

So there is a Postponed gain of = $200,000.

c) To calculate Mary’s basis of the newly acquired office building we would have to make the following calculation:

New basis = [$880,000 (fair market value of office building received)-$200,000 (postponed gain)].

=$680,000

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