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.

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.

Quizplus · Accepted Answer

In order to compute Babex's gain recognized on the exchange, we need to determine the fair market values (FMVs) of both properties. The FMV of the Babex property is given as $1,000,000, and the FMV of the OMG property is given as $1,175,000 ($1,000,000 + $175,000 mortgage assumption).

To calculate the gain recognized by Babex, we need to compare the FMV of the property given up ($1,000,000) to the FMV of the property received ($1,175,000). The difference is $175,000, so that is the amount of gain recognized by Babex.

Babex's tax basis in the property received from OMG is equal to the FMV of the property received ($1,175,000) minus the amount of gain recognized ($175,000), which equals $1,000,000.

Babex Inc and OMG Company Entered into an Exchange of Real