Jane owns a building for investment with an adjusted basis o

Jane owns a building for investment with an adjusted basis of $340,000 and a fair market value of $750,000. She exchanges the building for a building owned by Sue that Jane will use in her business. Sue’s building has a fair market value of $950,000 and is subject to a $200,000 liability. Jane assumes Sue’s liability and uses the building in her business. How much, if any, is Jane’s realized gain, recognized gain, and basis in the building received?

a. Gain realized of $610,000, gain recognized of 0, and basis in new building of $340,000.

b. Gain realized of $610,000, gain recognized of $610,000, and basis in new building of $750,000.

c. Gain realized of $410,000, gain recognized of 0, and basis in building of $540,000.

d. Gain realized of $410,000, gain recognized of $410,000, and basis of $750,000.

My answer I come up with is (c)Gain realized of $410,000, gain recognized of 0, and basis in building of $540,000.

Solution

Net Proceeds from the building received in exchange = Fair market value - Liability

= $950,000 - $200,000 = $750,000

Realized Gain = Net proceeds from the building received - Adjusted basis of old building

= $750,000 - $340,000 = $410,000

As no cash is received in exchange of building, the gain recognized will be zero ($0).

Basis in building received = FMV of building received - Realized gain not recognized

= $950,000 - $410,000 = $540,000

Therefore the correct option is c) Gain realized of $410,000, gain recognized of 0, and basis in building of $540,000.