[mszhao]

I just did two questions. I thought they are the same, but the answers are different. Is it my understanding problem or a bug?

Question 1: A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $17,500. The taxpayer agrees to assume a liability secured by the new auto of $1000. The other party also agrees to assume a liability secured by the taxpayer’s old auto of $3500. What is the gain or loss recognized by the taxpayer on this transaction?

The answer is $2500.

Explanation: Amount Realized 17500(FMV of new auto)+3500 (boot received)- 1000(boot paid) -17000(adjusted basis of old auto) =3000 Gain

Gain Recognized=$2500= lessor of realized gain of $3000 or net relief from liability(boot received) of 2500.

Question 2: A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $17,500. The other party agrees to give the taxpayer a trailer worth $3500 in addition to the new auto, and the taxpayer agrees to pay $1000 cash in addition to the trade-in. What is the gain or loss recognized by the taxpayer on this transaction?

The answer is $3000.

Explanation: Amount Realized 17500(FMV of new auto)+3500 (boot received)- 1000(boot paid) -17000(adjusted basis of old auto) =3000 Gain

Gain Recognized=$3000= lessor of realized gain of $3000 or boot received $3500.

Why the second not use net boot received as $2500?

Miracles happen every day

BEC-82 (11/25/2013)
REG-17 (11/26/2013)/RETAKE-80 (01/16/2014)
FAR-TBD
AUD-TBD

WITH BECKER TEXTBOOKS

[jewba07]

Bc it's the lesser of realized gain or boot received (gross). Not net boot received. Don't subtract 1000 from the 3500 in problem 2.

FAR - 74 (1/5/2013); 80 (5/30/2013)
BEC - 81 (7/21/2013)
AUD - 72 (8/30/2013); 71 (10/14/2013); 79(1/10/2014)
REG - 85 (12/5/2013)

[jewba07]

Oh whoops! I see what you're saying. Der

FAR - 74 (1/5/2013); 80 (5/30/2013)
BEC - 81 (7/21/2013)
AUD - 72 (8/30/2013); 71 (10/14/2013); 79(1/10/2014)
REG - 85 (12/5/2013)

[PJJW90810]

In the first problem, the liability aka boot is the same i.e liability assumed therefor you net. Whereas, example number #2 trailer and cash are different there u do not net.

Example #1: Original cost is 35K – 18K = 17K basis exchange into

Truck worth 17,500 + 3500 (liability relieved of) – 1000 (liability assumed) = 20K

20K – 17K = 3000 Gain REALIZED

RECOGNIZED gain: lesser of realized gain (3000) or boot received in this case you net the liabilities

3500 – 1000 = 2500

Example #2: Original coat is the same 17K

Truck worth is 17,500 + 3500 (add'l trailer) – 1000 (cash given by taxpayer) = 20K

20K – 17K = 3000 Gain REALIZED

RECOGNIZED gain: lesser of realized (3000) or boot received in this case you do not net because it's not the

same trade (trailer vs cash) so boot is just the trailer at 3500. Therefore answer is 3000.

Hope this explains it.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[mszhao]

thank you jewba07 and PJJW90810

to PJJW90810, how do you decide which boot should be chosen? For example 2, I know trailer and cash are different trade, but why you decide to choose trailer as boot received not cash?

Miracles happen every day

BEC-82 (11/25/2013)
REG-17 (11/26/2013)/RETAKE-80 (01/16/2014)
FAR-TBD
AUD-TBD

WITH BECKER TEXTBOOKS

[Not a Quitter]

I'm bumping this thread as I am stumped too! Great question.

FAR- 85 I'm DONE!
BEC- 75
REG- 60,60,75
AUD- 74,74,83

CPAExcel used for BEC, AUD, REG
Exam Matrix used for FAR plus NINJA Blitz, cpareviewforfree and a little CPAExcel

[PJJW90810]

RECOGNIZED gain is Boot RECEIVED. In example #2, the trailer was received while cash was given up.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[Anonymous]

I guess the question is: Why isn't the cash paid and boot received NETTED, for #2 for recognized gain?

Whereas in #1, the boot received and liabs relieved are NETTED to recognize gain?

Is it just a rule that we don't net cash with property?

[PJJW90810]

@dks it's not a specific rule, but implied within the ‘like-kind' rules. Look at it this way, if the vehicles were not included then the trade would not qualify as a like-kind exchange because a trailer and cash are not like-kind. Whereas in example #1, removing the vehicles from the exchange you would then be exchanging cash for cash which are like-kind.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[thehip41]

You can net the LIABILITIES traded.

You can't net the Liability with Cash though.

In example 1.

We gave up a 3500 and assumed a 1000 liability.

that's boot of 2500 for us. 0 for other dude

In the second example, we receive 3500 boot, other guy receives 1000 boot.

Those both need to be there to compute basis for each dude.

So in the second example, we have gain of 3,000, boot of 3500, so we recognize gain of 3,000 there.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[mszhao]

thank you all…I understand now!

Miracles happen every day

BEC-82 (11/25/2013)
REG-17 (11/26/2013)/RETAKE-80 (01/16/2014)
FAR-TBD
AUD-TBD

WITH BECKER TEXTBOOKS

[quantumfizz]

Great thread…bumping this for all those studying REG right now

[Tipofga80]

Got stuck on this questions for REG…. bumping for clarity sake “You can net the LIABILITIES traded. You can't net the Liability with Cash though.” lol

REG - 77 (will lose in Jan 2016)

BEC - 67 74, 75

AUD - 56, 70, Will try again 🙁

FAR - ??

Save the beast for last.

[Anonymous]

One of the best threads and the best question asked i have seen so far @thehip41

[Author]

Replies