I've been studying REG for awhile and this type of question still gets to me. I've spent hours on like-kind exchange problems (all the problems in Becker about cars.) Just when I think I know the right way to think about it, that will work for each type of question, this one pops up.
It makes no sense to me that the realized gain is based solely on the property given up. All the other problems have you take what you received less what you gave up to get realized gain.
Then on this one you add the net of the mortgages.
Is there a way to explain this (or how to differentiate this problem from similar ones testing different concepts) that will help it make some sense to me so I can remember it. Would really appreciate it.
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?
This answer is correct. Generally, no gain or loss is recognized on the exchange of business or investment property for property of a like kind. Since like-kind means the same class of property, an exchange of farmland for an office building qualifies as a like-kind exchange. However, in a like-kind exchange, a realized gain ($400,000 − $250,000 = $150,000 in this case) will be recognized to the extent of unlike property (i.e., boot) received. Here, Tatum's assumption of the $70,000 mortgage on the acquired office building is treated as boot paid, while the $120,000 mortgage on the farmland exchanged is treated as boot received. These mortgages are offset and result in Tatum receiving net boot and a recognized gain of $50,000.
3 out of 4 passed and sitting for FAR on May 31. Will lose credit for Audit if I don't pass FAR by Aug 4. I love leases and bonds.
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