Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis $120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the warehouse. Jason's basis in the land received will be

Question

A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.

Answer 1

A) $120,000.

The total value received in the exchange is $200,000 (the sum of the $150,000 FMV of the land plus the $40,000 debt relief and the cash of $10,000). The realized gain is $80,000 ($200,000 - $120,000 adjusted basis). The taxpayer receives $50,000 of boot (debt relief and cash). He will recognize $50,000, the lesser of the $50,000 of boot and the $80,000 realized gain. The basis of the land received will be $120,000 [$120,000 (old basis) - 50,000 (boot received) + 50,000 (gain recognized)] = $120,000 or the $150,000 FMV of property received less unrecognized gain of $30,000 = $120,000.