Question

1. Bee owns land (Bravo) with an adjusted basis of $60 and a fair market value of $100. Bravo is subject to a mortgage of $4. B sells the land to Dell who gives Bee $96 in cash and assumes the mortgage.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

2. Assume there is no mortgage and Bee swaps Bravo to Dell for land (Waterland) worth $90, and $10 cash.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

c)What is Bee’s basis in Waterland?

3. Assume there is no mortgage but Waterland is worth $45 so Bee gets Waterland plus $55 in cash.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

c)What is Bee’s basis in Waterland?

Answer 1

1. Bee owns land (Bravo) with an adjusted basis of $60 and a fair market value of $100. Bravo is subject to a mortgage of $4. B sells the land to Dell who gives Bee $96 in cash and assumes the mortgage.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

Realised gain = Cash received + Fair market value of property received + liabilities of seller assumed by buyer - selling expenses - Adjusted basis of property

Substituting the values in above formula

Realised gain = $96+0+$4 - $60 = $40

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

Recognised gain is taxable portion of realised gain. In the current scenario as recognised gain would be same as realised gain as there is no exchange of property nor is there any reinvestment proposed of the realised gain.

Hence recognized gain = $40.

2.  Assume there is no mortgage and Bee swaps Bravo to Dell for land (Waterland) worth $90, and $10 cash.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

Realised gain = Cash received + Fair market value of property received + liabilities of seller assumed by buyer - selling expenses - Adjusted basis of property

Substituting the values in above formula

Realised gain = $10+90+0-0- $60 = $40

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

Bee is going to recognise gain of $10 as $90 is an exchange of property and hence is not taxable

c)What is Bee’s basis in Waterland?

In any like-kind exchange, the exact amount of any unrecognized gain or loss is preserved in the basis of the asset acquired in the exchange.

In current scenario unrecognized gain of the asset is $40-$10 = $30 ($10 is recognized gain)

Hence basis of the Waterland for Bee would be $90- $30 = $60

3. Assume there is no mortgage but Waterland is worth $45 so Bee gets Waterland plus $55 in cash.

a)Does Bee realize gain/loss on the transaction and if yes, how much?

Realised gain = Cash received + Fair market value of property received + liabilities of seller assumed by buyer - selling expenses - Adjusted basis of property

Substituting the values in above formula

Realised gain = $55+45+0-0- $60 = $40

b)Does Bee recognize gain/loss on the transaction and if yes, how much?

Recognized gain would be cash received for the transaction subject to the maximum of the capital gain.

Here we received cash of $55 but total capital gain is only $40. Hence the recognized gain would be $40.

c)What is Bee’s basis in Waterland?

As there is no unrecognized gain in the transaction,the basis in water land would be its fair market value of $45.