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 calculate Dally's gain recognized, we need to compute the amount realized and the adjusted basis. The amount realized is the fair market value of the property received ($350,000) minus the mortgage assumed ($250,000) plus the mortgage released ($150,000), which equals $250,000. The adjusted basis is the fair market value of the property given up ($300,000) plus the mortgage assumed ($100,000), which equals $400,000. Thus, the realized gain is $250,000 - $400,000 = -$150,000, but because this is a nonrecognition exchange, no gain or loss is recognized. Dally's tax basis in the property received is equal to Perry's adjusted basis in the property given up ($300,000) minus the mortgage assumed by Dally ($100,000), which equals $200,000. Therefore, the correct answer is C.

Perry Inc and Dally Company Entered into an Exchange of Real