Lindsey exchanges investment real estate parcels with Donna. Her adjusted basis in the property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is the amount of gain recognized by Lindsey?
A)$- 0 -
B)$100,000
C)$200,000
D)$500,000
E)$900,000

Question

Quizplus · Accepted Answer

When assets are exchanged, the gain or loss recognized is calculated by subtracting the adjusted basis of the asset given from the fair market value of the asset received. In this case, Lindsey's property has an adjusted basis of $400,000 and is being exchanged for Donna's property, which has an appraised value of $1,000,000. Therefore, Lindsey has a potential gain of $600,000. However, she is also assuming a liability of $100,000, which reduces the gain to $500,000. Since Lindsey's adjusted basis in the exchanged property is $400,000, she only recognizes the gain of $100,000 ($500,000 - $400,000). Therefore, the answer is B) $100,000.

Lindsey Exchanges Investment Real Estate Parcels with Donna