[Bluetoothray]

Ninjas,

I have a problem. I understand the explanation behind this question, but I don’t understand how they are calculating the gain. Here’s the question and explanation.
Gary Berg, a farmer, exchanges a tractor with a basis of $40,000 and a value of $50,000 for a tractor with a value of $44,000 plus $6,000 cash. The basis of the tractor acquired by Gary is:

A.

$40,000.

B.

$44,000.

C.

$46,000.

D.

$50,000.
In a like-kind exchange, the basis of property received is the basis of the property given up plus any gain recognized, plus boot (cash or property not of a like kind) paid, less any loss recognized, less boot received. The basis of the tractor received is $40,000 ($40,000 + $6,000 gain – $6,000 boot received). The gain of $6,000 is the lesser of the realized gain of $10,000 or boot received of $6,000.
I get that you start with the basis of the tractor you’re giving up, 40,000. My question is where is this 6,000 gain coming from? The explanation says that it’s the lesser of the realized gain of 10,000 or the boot received. Where’s this 10,000 gain???? It’s a 4,000 gain isn’t it? Any help would be much appreciated.

Thanks

[ThomasHallberg]

The 10,000 is the realized gain. 44,000 + 6,000 boot = 50,000… Your basis is 40,000. Realized gain is 10,000. However, you will only recognize the 6,000 as a gain because it is less than your realized gain.

[ThomasHallberg]

I recommend doing these by hand and writing out a table. They get super confusing when liabilities and boot are transferred by both parties. Do a bunch of these and write them down on paper as a table the way you understand them. I made two big columns, one labeled OWN and one labeled WANT and then write all the information down. It really does make them easier. Good luck!

[RE2PECT]

He has a realized gain of 10k (44k new tractor + 6k cash – 40k old tractor). His recognized gain is the lesser of the realized gain (10k) or boot received (6k).

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[Bluetoothray]

Thanks for the responses. I understand now. So his realized gain is 50k, his recognized gain is 6k, because that't he extent of the boot received. His basis is the original cost 40k + the realized gain 6k – the boot received 6k = 40k. @thomashallberg thanks for the suggestion.

[ThomasHallberg]

Everything but he has a realized gain of 10k (44k new tractor + 6k cash BOOT – 40k old tractor). Basically when you calculate the recognized gain for like-kind exchanges you want to always calculate your gain realized, because if it is less than the boot received, it would be the gain. In this case, the 6,000 is less than the 10,000 REALIZED gain, therefore, gain RECOGNIZED is 6,000. For an example, if the realized gain was 5,000 and the boot was 6,000 cash, RECOGNIZED GAIN would be 5,000. If it doesn't make sense post another and we can go over it.

[Author]

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