Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r }
& \text { Babex } & O M G \
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & \mathbf { 7 6 8 , 0 0 0 } & \mathbf { 5 1 4 , 5 0 0 } \
\text { Mortgage } & \mathbf { 1 7 5 , 0 0 0 } & - \mathbf { 0 } -
\end{array}$$ 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.
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 above

Question

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. $$\begin{array} { l r r } 
& \text { Babex } & O M G \
\text { FMV } & \$ 1,000,000 & \$ 825,000 \
\text { Adjusted tax basis } & \mathbf { 7 6 8 , 0 0 0 } & \mathbf { 5 1 4 , 5 0 0 } \
\text { Mortgage } & \mathbf { 1 7 5 , 0 0 0 } & - \mathbf { 0 } -
\end{array}$$ 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.
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 above

Quizplus · Accepted Answer

Babex recognizes a gain of $175,000 due to the mortgage relief. The basis in the OMG property is the adjusted basis of the Babex property ($768,000) plus the gain recognized ($175,000) minus the mortgage assumed ($175,000), resulting in a basis of $768,000.

Babex Inc and OMG Company Entered into an Exchange of Real