Question

1) Albert is considering two options for selling land for which he has an adjusted basis of $45,000

and on which there is a mortgage of $90,000. Under the first option, Albert will sell the land for

S110,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is

complete. Under the second option, Albert will sell the land for $20,000 and the buyer will

assume the mortgage. Calculate Albert's recognized gain under both options.

3) Porter exchanges land used in his business in a like-kind exchange. The property exchanged is as

follows:

       Property Surrendered Property Received

       Adi. Basis FMV           Adi. Basis FMV

Land 50000   60000           28000   30000

Cash 25000   25000       5000   5000

What is Porter's recognized gain or loss?

a.

What is Porter's basis for the assets he received?

b.

Answer 1

Answer 2.

Calculation of Albert's recognized gain under both options.

	Option 1	Option 2
Amount realized;
Cash	$110,000	$20,000
Add: Mortgage assumed by Buyer	_	$90,000
Amount realized by Albert	$110,000	$110,000
Less: Adjusted Basis of land	$45,000	$45,000
Recognized Gain by George on exchange	$65,000	$65,000

Explanation: Under the first option, Albert will sell the land for S110,000 and he liquidate the mortgage before the sale is complete. So, the mortgage of $90,000 will not taken either into “Amount realized” or “Adjusted Basis”.

Amount realized is the total cash received from asset sold, liabilities assumed by the buyer and liabilities transferred with the asset. Adjusted Basis means the cost of assets, additions, improvements and deduction of depreciation.

Under the second option, Albert will sell the land for $20,000 and the buyer will assume the mortgage. Therefore, mortgage of $90,000 added to the “Amount realized”.

Therefore, Recognized gain under both options are equal of $65,000.

Answer 3.

a.What is Porter's recognized gain or loss?

Amount realized;
FMV of like-kind Property received	$30,000
Cash received	$5,000
Amount realized by Porter		$35,000
Less: Adjusted Basis of property surrendered	$50,000
Cash paid	$25,000	$(75,000)
Realized Loss by Porter on exchange		$(45,000)

Therefore, Recognized loss of Porter’s Like-kind exchange is $(45,000), Since the amount realized is less than Adjusted Basis of land exchanged.

b.What is Porter's basis for the assets he received?

Porter’s Basis for the asset he received is $28,000, which doesn’t include Cash. Basis of assets means “the cost of asset acquired, plus improvements or certain additions to the assets and minus by the depreciation and losses”