Question

Frances exchanges an apartment building complex, Forestview, with a fair market value of $500,000, subject to a mortgage of $200,000, for Oceanview, an apartment building complex owned by Gayle. The fair market value of Oceanview is $500,000, and it is subject to a mortgage of $250,000. Gayle also transfers $50,000 of cash to Frances. Frances’ basis in Forestview is $150,000. Gayle’s basis in Oceanview is $100,000. How much gain is realized and recognized by Frances and Gayle? What are Frances’ and Gayle’s respective bases in the property received by each?

Answer 1

How much gain is realized and recognized by Frances and Gayle?

The realized gain by Frances

The amount received by frances is as under

• Building complex oceanview with FMV of $500,000
• Cash of $50,000
• Net mortgage boot of ($50,000)

The amount given up by Frances

• The basis of in forest view of $150,000

Realized gain = $500,000 +$50,000-$50,000-$150,000

=$350,000

Recognized gain = cash received + net debt relief

=$50,000 - $50,000

=$0

The realized gain by Gayles

The amount received by Gayles is as under

• Building complex forestview with FMV of $500,000
• Net mortgage boot of $50,000

The amount given up by Frances

• The basis of in oceanview of $100,000

Realized gain = $500,000 +$50,000-$100,000

=$450,000

Recognized gain = net debt relief or realized gain whichever is less

=$50,000 net debt relief

=$50,000

What are Frances’ and Gayle’s respective bases in the property received by each?

The substitute basis of acquired property. The formula is given below

Substitute basis of acquired property = Fair market value of property received – (realized gain – recognized property)

Calculation of Substitute basis of acquired property for Frances

= Fair market value of property received – (realized gain – recognized property)

= $500,000 –($350,000-$0)

=$150,000

The Substitute basis of acquired property for Frances is $150,000

Substitute basis of acquired property for Gayle’s

= Fair market value of property received – (realized gain – recognized property)

= $500,000 –($450,000-$50,000)

=$$500,000-$400,000

=$100,000

The Substitute basis of acquired property for Gayle’s is $100,000