Violet exchanges investment real estate with Russell. Violet's adjusted basis in her two-year old property is $280,000. The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged. Russell assumes that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange. Russell pays Violet enough in cash to balance the exchange. What is Russell's recognized gain (loss) on the exchange?
A)$-0-
B)$70,000
C)$80,000
D)$150,000

Question

Quizplus · Accepted Answer

Russell's realized gain on the exchange can be calculated as follows:

Fair market value of Russell's property = $150,000 
Less: Adjusted basis of Russell's property = $80,000

Realized gain = $70,000

However, in a like-kind exchange, any realized gain is not recognized for tax purposes if the exchange meets certain requirements under IRC Section 1031. In this case, the exchange qualifies for treatment as a like-kind exchange because both properties are investment real estate and both parties are exchanging property of similar value. Additionally, Russell is assuming the mortgage on Violet's property, which is not considered boot (cash or other property received in the exchange) for tax purposes. Therefore, Russell's recognized gain on the exchange is $-0-.

Violet Exchanges Investment Real Estate with Russell