Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Question

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Quizplus · Accepted Answer

To compute Dally's gain recognized on the exchange, we need to first calculate the amount of boot received. Boot is any property received in the exchange that is not like-kind. In this case, because Perry assumed the mortgage on the Dally property, Dally received $30,000 in cash as boot (the difference between the mortgage on the Perry property and the mortgage on the Dally property).

Dally's gain recognized on the exchange is equal to the lesser of the realized gain or the boot received. Dally's realized gain is the fair market value of the property received ($300,000) less Dally's tax basis in the property given up ($150,000), which is $150,000. Therefore, Dally's gain recognized on the exchange is $30,000.

To determine Dally's tax basis in the property received from Perry, we start with the tax basis in the property given up ($150,000) and add any boot given ($0 in this case) and subtract any boot received ($30,000 in this case). Therefore, Dally's tax basis in the property received from Perry is $120,000 ($150,000 - $30,000).

Perry Inc and Dally Company Entered into an Exchange of Real