On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of
$125,000).The property transfers were made subject to the mortgages.What amount of gain should Paula recognize?
A)$0
B)$25,000
C)$125,000
D)$175,000

Question

Quizplus · Accepted Answer

In a like-kind exchange, Paula would recognize no gain if both properties are of like kind and the exchange is solely in kind. The fact that both properties are subject to equal mortgages ($125,000) means there's no relief of debt greater for one party over the other, which could otherwise trigger gain recognition. The exchange is treated as if Paula is trading her equity in her building ($250,000 adjusted basis minus $125,000 mortgage) for an equal value in Nick's building, making this a non-recognizable event for tax purposes.

On October 1, Paula Exchanged an Apartment Building (Adjusted Basis