Question

Bart exchanges some real estate (basis of $800,000 and fair market value of $1 million) for other real estate owned by Roland (basis of $1.2 million and fair market value of $900,000) and $100,000 in cash. The real estate involved is unimproved and is held by Bart and Roland, before and after the exchange, as an investment property.

a. What is Bart's realized gain on the exchange? Recognized gain?

b. What is Roland's realized loss? Recognized loss?

c. Support your results in (a) and (b) under the wherewithal to pay concept as applied to like-kind exchanges.

Answer 1

a) Bart has a realized gain of $ 2,00,000.

-Bart's recognised gain is limited to the lesser of the realized gain of $ 2,00,000 or the other property (boot) received of $ 1,00,000. Thus, the recognised gain is limited to other property ( cash) received of $ 1,00,000 ( the amount of cash received by Bart)

b) Roland has a realized loss of $ 3,00,000

None of Roland's realized loss can be recognised.

c) Under the wherewithal to pay concept, forcing Bart to recognise a gain of $ 1,00,000 makes sense . Because of the $ 1,00,000 cash received, not only has Bart's economic position changed, but he now has the means to pay the tax on the portion of the realized gain that is recognised.

The disallowance of Roland's realized loss is consistent with the usual approach of the wherewithal to pay concept. Not only is this the price that must be paid for tax free treatment, but also a carryover basis and adjustment prevents a deterioration of Roland's tax position.

Note : After the exchange, Roland has a basis of $ 13,00,000 in the real estate  received from Bart