Kai owns an apartment building held for investment purposes.The apartment building is worth $500,000,although it is subject to a mortgage of $100,000.Kai's basis in the apartment building is $380,000.Kai exchanges the apartment building for an office building.The office building has an FMV of $350,000.Kai receives $50,000 cash in addition to receiving the office building,and the other party assumes the apartment building mortgage.What is Kai's recognized gain on this exchange?
A)$0
B)$50,000
C)$120,000
D)$150,000

Question

Quizplus · Accepted Answer

To calculate Kai's recognized gain, we need to compare the FMV of the property given up ($500,000) to Kai's adjusted basis in the property ($380,000). The difference is $120,000, which represents Kai's potential gain on the exchange. However, Kai receives $50,000 cash in addition to the office building, which reduces the potential gain to $70,000. Since Kai is not receiving any other property or services in the exchange, this gain is recognized and taxable. Therefore, the answer is choice C, $120,000.

Kai Owns an Apartment Building Held for Investment Purposes