Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $\begin{array}{lrrr}
&\text {Babex}&\text {OMG}\
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & 768,000 & 514,500 \
\text { Mortgage } & 175,000 & -0 -
\end{array}$
Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

Question

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $\begin{array}{lrrr}
&\text {Babex}&\text {OMG}\
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & 768,000 & 514,500 \
\text { Mortgage } & 175,000 & -0 -
\end{array}$
 Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

Quizplus · Accepted Answer

To compute Babex's gain recognized on the exchange, we need to compare the fair market value (FMV) of the property it transferred to OMG with its adjusted basis in the property.

FMV of Babex property = $1,000,000 
Adjusted basis of Babex property = $650,000

Therefore, Babex's realized gain on the exchange is $1,000,000 - $650,000 = $350,000.

However, since OMG assumed the mortgage on the Babex property, we need to reduce Babex's recognized gain by the amount of debt relief it received.

Debt relief = $175,000

Therefore, Babex's recognized gain on the exchange is $350,000 - $175,000 = $175,000.

To compute Babex's tax basis in the property received from OMG, we simply take OMG's adjusted basis in the property.

OMG's adjusted basis in the property = $768,000

Therefore, Babex's tax basis in the OMG property is also $768,000.

Babex Inc and OMG Company Entered into an Exchange of Real