Eric exchanges farmland with an adjusted basis of $64,000 for a new acre of farmland with...

Eric exchanges farmland with an adjusted basis of $64,000 for a new acre of farmland with a $100,000 fair market value. In addition, he receives $20,000 of marketable securities.

a. What is the amount of gain realized by Eric?

b. What is the amount of gain recognized by Eric?

c. What is Eric's basis in the new farmland?

d. What is Eric's basis in the marketable securities?

Expert Solution

(a) Realized gain is the increase in the value of the asset when exchange occurs. Here farmland is exchanged with the new acre of farmland at $100,000 fair market value and also receives $20,000 of marketable securities.

therefore, the amount of gain realized = fair market value + marketable securities - old farmland value

amount of gain realized = 100,000 + 20,000 - 64,000 = $56,000

(b) the taxation portion of the realized gain is the recognized gain. recognized gain is the lesser of the boot (other property added to exchange) or the amount of realized gain.

here boot is the additional marketable securities i.e $20,000 and realized gain is $56,000 (calculated in part "a")

therefore, amount of gain recognized = $20,000

(c) Eric's basis in new farmland= Value of farmland - boot received (marketable securities) + ganin recognized

eric's basis in new farmland = 64,000 + 20,000 - 20,000 = $64,000

(d) eric's basis in marketable securities = amount of marketable securities received as a boot = $20,000

ekkarill92 answered 1 year ago

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