Cindy exchanges investment real estate with Russell. Cindy purchased her realty two years ago for $280,000, and it is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged. Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange. Russell assumes the debt on his new land and pays Cindy enough in cash to balance the exchange. What is Cindy's recognized gain (loss) on the exchange?
A)$-0-
B)$40,000
C)$100,000
D)$170,000

Question

Quizplus · Accepted Answer

To calculate Cindy's recognized gain (loss) on the exchange, we need to calculate her realized gain (loss) first:

Realized gain (loss) = FMV of the property received - Adjusted basis of the property given up

Adjusted basis = purchase price - accumulated depreciation - mortgage assumed
Adjusted basis of Cindy's property = $280,000 - 0 - $100,000 = $180,000

Realized gain = $320,000 - $180,000 = $140,000

Since Cindy is exchanging the property, she can defer the recognition of the realized gain under Section 1031 of the Internal Revenue Code. Therefore, her recognized gain on the exchange will be $-0- (choice A).

Cindy Exchanges Investment Real Estate with Russell