Nancy acquired office equipment for her business three years ago at a cost of $15,000. During the current year, she exchanges the equipment for different equipment with a fair market value of $9,000. MACRS depreciation on the original equipment was $9,828. What is the amount and character of the gain recognized?

Question

Quizplus · Accepted Answer

When an asset is exchanged in a like-kind exchange, the gain or loss may be deferred. However, if cash or dissimilar property is received, the gain is recognized to the extent of the lesser of the realized gain or the cash and FMV of the other property received. In this scenario, Nancy received equipment with a FMV of $9,000, which is less than the original cost of $15,000. The realized gain is the fair market value of the equipment received ($9,000) minus the adjusted basis of the old equipment ($15,000 - $9,828 = $5,172), which equals $3,828. Because this is a like-kind exchange of depreciable property, the gain is treated as Section 1245 ordinary income. Therefore, the correct answer is C.

Nancy Acquired Office Equipment for Her Business Three Years Ago