Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Question

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Quizplus · Accepted Answer

To compute the gain recognized, we first need to determine the fair market value (FMV) of the property received by Johnson. The FMV is equal to the cash paid by C&K plus the amount of the mortgage assumed by C&K, which is $25,000 + $200,000 = $225,000.

Johnson's basis in the property given up is $400,000, and the mortgage assumed by C&K is $200,000, so the total amount realized is $225,000 + $200,000 = $425,000.

Since the amount realized ($425,000) exceeds the basis in the property given up ($400,000), Johnson has recognized a gain of $25,000 ($425,000 - $400,000).

Johnson's tax basis in the property received from C&K is equal to the FMV of the property, which is $225,000. Therefore, the correct answer is (C) $225,000 gain recognized; $593,000 basis in C&K property.