[needhelpnow]

This is the formula I have, which I used for question listed below the formula:

Step #1) Calculate the boot received, boot paid, and amount realized

Boot RECEIVED = Cash RECEIVED + FMV of non like-kind property RECEIVED + net relief of liabilities

Boot PAID = Cash PAID + FMV of non like-kind property PAID (gave up) + net relief of liabilities assumed

Amount realized = FMV of New Property received + FMV of Boot received – FMV of Boot paid

Step #2) Find out realized gain so we can determine recognized gain

Realized gain = Amount realized – Adjusted basis (NBV) of property given up

Recognized gain = LESSER of realized gain or boot received

Step #3) Calculate basis of new property received

Basis of new property received = Adjusted basis (NBV) of property given up + GAIN RECOGNIZED + Boot Paid – Boot received

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In the current year Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other’s mortgage. What is the amount of Tatum’s recognized gain?

Correct answer is B. $50,000

Tatum should recognize a gain of $50,000. Since each party assumed the other’s mortgage, Tatum’s mortgage liability was reduced from $120,000 to $70,000, and thus he benefited or gained by $50,000.

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But based off of the formula, I have:

Boot Received: 120k

Boot Paid: 70k

Amt Realized = 350k+120k-70k = 400k

Realized Gain = 400k-250k = 150k

Recognized Gain = LESSER of realized gain (150k) or boot received (120k), THEREFORE, according to this, it should be 120k.

Then why is the correct answer 50K. Please help! Thank you.

[sunlessC]

the two mortgage boots will offset each other

Tatum's $120,000 mortgage was assumed but they also assumed a $70,000 mortgage themselves.

they didn't get $120,000 of boot here. they got $120,000 – 70,000 = $50,000 of boot. the boot is the liability relief, and since the amount of mortgage they had only decreased by a net $50,000, the boot received is $50,000.

[leglock]

When u r dealing with both assuming a mortgage and having ur mortgsge assumed u net the amount together. Thats y its 50 thousand gain recognized.

Note that if u both receive cash and pay cash u do not net them together. You would recognize the cash u recd irrespective of any cash u paid obviously subject to gain realized limitation

If ur using becker they do not run through these rules but i think they r implrtant to know

[rzrbkfaith]

@leglock – you're right. I think I had MAYBE one question on netting assumed mortgages and one question on cash paid and received.

AUD - 99
BEC - 97
REG - 91
FAR - 1/8/16

[needhelpnow]

@leglock Thank you for explaining.

So just to understand better, if there is cash involved, I would use the formula above? Please let me know. Thank you!

[leglock]

I think ur boot recd and boor paid formula is from becker. Those formulas look correct , but they dont necessarily speak to what should or should not be netted together. For exmple u receive cash and assume liability vs receive cash and pay cash vs assume and give away liability. This was covered in my tax class but was not in beckers mtl

Also, there is an alternate formula for basis of new property recd which is fmv new recd plus loss deferred loss minus gain deferred. Notice ur formula starts with adjusted basis and the alternate starts with fmv. Its good to know both bc some problems will give u either ab or fmv but not nexessarily both. I think the becker chapter problems have a few of these.

[Danime]

I had the same issue with Becker and the way that they explained this topic, it was confusing.

They way I made sense if it was:

Amount Realized = What you get (FMV of Property + Boot Received (Mortgage Assumed or Cash Paid)) – What you gave up (NBV + Boot Paid (Mortgage Assumed or Cash Paid)) = Gain (Loss) REALIZED

Amount Recognized = The lesser of Gain REALIZED or Boot Received (If mortgages are involved you must net*)

Deferred Gain (Loss) = Gain (Loss) REALIZED – Gain RECOGNIZED

Basis of New Property = FMV of New Property – Deferred Gain + Deferred Loss

FAR 5/31/14 - 86
AUD 7/28/14 - 94
REG 10/1/14 - 89
BEC 11/10/14 - 88

[needhelpnow]

Thank you @Danime!

[needhelpnow]

Thank you @leglock!

[Author]

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