Thirty years ago, Prescott Inc. realized a $16,200 gain on the exchange of an old building for a new building. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new building for $250,000. At date of sale, the new building's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

Question

Quizplus · Accepted Answer

The nontaxable exchange resulted in a deferral of the taxable gain, which reduced the tax basis of the new building acquired. Therefore, the tax basis of the new building was lower than its book basis. When the building was sold, the gain realized was the excess of the amount realized over the tax basis, which was zero. Consequently, there was no deferred tax balance associated with the sale.

Thirty Years Ago, Prescott Inc