[nicole_123]

Hi,

Wondering if anyone can help me understand why I got this particular problem wrong?

“A taxpayer is trading in an automobile for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 of depreciation. The old automobile is currently worth $20,000 and the new automobile is worth $17,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto, and the taxpayer agrees to pay $1,000 cash in addition to the trade-in. What is the taxpayer’s basis in the new automobile received?”

I selected $17,000 as the new basis. I calculated it as $17,500 FMV of the new auto + 0 for deferred loss – $500 deferred gain (the difference between the $3,000 realized gain and the $3,500 of boot received.)

Becker is saying the answer is $17,500 (no deferred loss or deferred gain). Can anyone help me out here? Thanks!

[Anonymous]

The taxpayer's basis in the new automobile received is $17,500. There is no deferred gain because all of the amount realized ($3,000) would be recognized since the gain realized is recognized to the extent of the boot received, which would be the trailer that is worth $3,500.

Let's assume that the trailer (boot/loot) received from the buyer is worth less than the gain realized ($3,000), say $2,500, then the taxpayer can recognize the gain realized of $3,000 only up to $2,500 and defer the rest ($500). In this case, the taxpayer's basis in the new automobile received would be $17,000 = $17,500 – $500.

I hope this helps!

[murano]

Hi nicole,
gain realized=20000-17000=3000
gain recognized=lesser(gain realized,boot received)=3500 (when boot is received and paid, do not net agaisnt each other unless each party assumes liability)
new basis=ab old+gain recognized+boot paid-boot received=17000+3000+1000-3500=17500
or
new basis=fmv new-deferred gain=17500

[Anonymous]

“The basis of like-kind property received is the basis of like-kind property given.

17,000 adjusted basis +

(a) + Gain recognized = 3,000 (20,000 FV – 17,000 BV)
(b) + Basis of boot given = 1,000 (cash)
(c) – Loss recognized = 0
(d) – FMV of boot received = 3,500 (trailer)
——————————————–
= 500

= 17,500 new basis

[nicole_123]

Thank you so much! This totally helps. I guess I didn't understand what deferred gain meant. Thanks!

[Author]

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