Glen owns a building that is used in business.The building is worth $200,000,but is subject to a mortgage of $40,000.Glen's basis in the building is $120,000.Glen exchanges the building for investment land worth $150,000 plus $10,000 cash.In addition,the other party assumes the mortgage which will be held for investment.Glen must recognize a gain of
A)$0.
B)$10,000.
C)$50,000.
D)$80,000.

Question

Quizplus · Accepted Answer

To determine the gain recognized in an exchange, we need to compare the amount realized with the adjusted basis of the property being exchanged. In this case, Glen exchanged a building with a fair market value of $200,000 and an adjusted basis of $120,000 for investment land worth $150,000 plus $10,000 cash. The other party also assumed the mortgage of $40,000, which will be held for investment.

The amount realized in this exchange includes the fair market value of the investment land ($150,000) plus the cash received ($10,000) plus the mortgage assumed ($40,000), totaling $200,000.

To calculate the adjusted basis of the building being exchanged, we need to start with Glen's original basis of $120,000 and adjust for any improvements or depreciation taken. Since no additional information is given about improvements or depreciation, we can assume that the adjusted basis remains at $120,000.

Therefore, Glen's realized gain is $200,000 (amount realized) minus $120,000 (adjusted basis) equals $80,000. Since the property being exchanged is business property (building) and the property received is investment property (land), this exchange is not like-kind and does not qualify for nonrecognition under Section 1031. Therefore, Glen must recognize the entire gain of $80,000. The correct answer is C.

Glen Owns a Building That Is Used in Business