Question

Rose company owns Machine A (adjusted basis of $12,000 and fair market value of $15,000), which it uses in its business. Rose sells Machine A for $15,000 to Aubry (a dealer) and then purchases Machine B for $15,000 from Joan(also a dealer). Machine B would normally qualify as like-kind property. a. What are Rose Company's realized and recognized gain on the sale of Machine A? b. What is Rose's basis for Machine B? c. What factors would motivate Rose to sell Machine A and purchase Machine B rather than exchange one machine for the other? d. Assume that the adjusted basis of Machine A is $15,000 and the fair market value of both machines is $12,000. Respond to parts (a) through (c).

Answer 1

Solution:

(a) Calculation of Rose's Company realised and recognized gain on the sale of Machine:

Particulars	Amount($)
Amount realised	15,000
Adjusted basis	(12,000)
Realized gain	3,000

Therefore, recognized gain = $3,000

(b) The basis for Machine 'B' is its cost of $15,000

(c) Such an exchange would have been resulted in the realized gain postponed under 1031. However, this would have caused Rose Company's basis in the machine received to be $12,000($12,000 adjusted basis + $0 boot given or $15,000 fair market value- $3000 postponed gain). Because the sale transaction is fully taxable, the recognition of gain let's Rose Company have a higher basis for the new machine. In addition, Rose May have some losses with which it can offset the $3,000 recognized gain.

(d)

Particulars	Amount ($)
Amount realized	12,000
Adjusted basis	(15,000)
Realized loss	(3,000)

Therefore, recognized loss = ($3,000)

The basis for machine 'B' is its cost of $12,000.

Avoiding 1031 treatment enables Rose Company to recognize the $3,000 realized loss.