I presumed that the phrase “plus cash of $50,000” means boot PAID.
I was wrong, it means boot RECEIVED.
Big difference!
This was the same issue I had with nonmonetary exchange transactions with FAR.
How do we catch simple misunderstanding of this kind of scenario?
CPA-01747
In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction:
Property given up by Reed
Fair value $ 500,000
Adjusted basis $300,000
Property received by Reed
Fair value $450,000
What amount of gain should be recognized in Reed's Year 9 income tax return?
a. $200,000
b. $100,000
c. $50,000
d. $0
Explanation
Choice “c” is correct. $50,000 is Reed's recognized gain in Year 9.
Rule: Gain is only recognized on an exchange of “like-kind” property for the lesser of the amount of “gain realized” or the amount of “boot” received in the exchange.
Fair value of property received >>>>>>>>>>>>>>>>> $450,000
Amount of cash (“boot”) received>>>>>>>>>>>>>>>> 50,000
Total amount realized >>>>>>>>>>>>>>>>>>>>>>> 500,000
Basis of property given up >>>>>>>>>>>>>>>>>>>> (300,000)
Gain realized >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>$ 200,000
Gain recognized* >>>>>>>>>>>>>>>>>>>>>>>>>> $ 50,000
* Gain recognized is the lesser of the amount of “gain realized” or amount of the “boot” received.
Choices “a”, “b”, and “d” are incorrect, per the above rule
.