Babex Inc.and OMG Company entered into an exchange of real property.Here is the information for the properties to be exchanged. 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.
A)$175,000 gain recognized; $768,000 basis in OMG property.
B)No gain recognized; $768,000 basis in OMG property.
C)$175,000 gain recognized; $943,000 basis in OMG property.
D)None of the choices are correct.

Question

Babex Inc.and OMG Company entered into an exchange of real property.Here is the information for the properties to be exchanged.   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.
A)$175,000 gain recognized; $768,000 basis in OMG property. 
B)No gain recognized; $768,000 basis in OMG property. 
C)$175,000 gain recognized; $943,000 basis in OMG property. 
D)None of the choices are correct.

Quizplus · Accepted Answer

To calculate the gain recognized by Babex Inc., we need to compare the fair market value (FMV) of the property it transferred to OMG Company with the tax basis of that property. The FMV of the Babex property is not given in the question, so we cannot calculate the gain or loss on that side of the exchange. However, we do know that OMG assumed the mortgage on the Babex property, which means that the mortgage value is part of the consideration for the exchange. Therefore, we can treat the mortgage as cash received by Babex in the exchange.

Assuming that the mortgage value of $593,000 is equal to the tax basis of the Babex property, Babex's tax basis in the OMG property it received is $768,000 ($593,000 + $175,000 gain). Therefore, the gain recognized by Babex is $175,000, which is the excess of the FMV of the Babex property over its tax basis. So, the correct answer is A.

Babex IncAnd OMG Company Entered into an Exchange of Real Property