Question

Bob owns a duplex used as rental property. The duplex has a basis of $86,000 and a fair market value of $300,000. Bob transfers the duplex to his brother, Carl, in exchange for a triplex that Carl owns. The triplex has a basis of $279,000 and a fair market value of $300,000. Two months after the exchange, but in the same taxable year as the exchange with his brother, Carl sells the duplex to his business associate for $312,000.

a. What are the tax consequences to Bob with respect to these transactions?

b. What are the tax consequences to Carl with respect to these transactions?

Assume the same facts as above, except that Carl sells the duplex to an unrelated person more than two years after the exchange with Bob. Without taking into consideration any changes to the adjusted basis of the property subsequent to the exchange with Bob (such as for depreciation),

a.) how much, if any, is Bob’s realized and recognized gain with respect to these transactions?

b.) Carl’s realized and recognized gain with respect to these transactions?

Answer 1

Part 1

Answer A

Bob must realize and recognize gain of $214,000 ($300,000 - $86,000). This exchange cannot be referred as a like kind exchange as it was made with a related party who disposed of the property within 2 years after the exchange.

Answer B

Cindy must realize and recognize gain on the sale of $12,000 ($312,000 -$300,000). She must also recognize $21,000 ($300,000 - $279,000) gain on the exchange as it does not qualify for the like kind. Therefore, the basis of the property sold that is considered is $300,000.

Part 2

Answer A

Amount realized $300,000 - Adjusted basis 86,000 = Gain realized $214,000

None of the gain is recognized because neither of related party transferred the property within 2 years of the exchange.

Answer B

Amount realized $300,000 - Adjusted basis 279,000 = Gain realized $ 21,000

None of the gain is recognized because neither of related party transferred the property within 2 years of the exchange.