Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land?
A) $0 and $420,000.
B) $100,000 and $420,000.
C) $100,000 and $520,000.
D) $280,000 and $700,000.
E) None of the above.

Question

Quizplus · Accepted Answer

When exchanging property, the gain or loss is not recognized if it is a like-kind exchange. In this case, since Pam exchanged a rental building for investment land, which are both considered real property, the exchange qualifies as a like-kind exchange. Therefore, no gain or loss is recognized.

The basis of the investment land is determined by taking the adjusted basis of the relinquished property (rental building) and adding any cash received in the exchange.

Basis of Investment Land = Adjusted Basis of Rental Building + Cash Received
Basis of Investment Land = $520,000 + $100,000
Basis of Investment Land = $620,000

Therefore, the recognized gain or loss is $0 and the basis of the investment land is $620,000.

Pam Exchanges a Rental Building, Which Has an Adjusted Basis