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bryris
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On 10/1/08, Don exchanged an apartment building, having an A/B of $375,000 and subject to a mortgage of $100,000, for $25,000 cash and another apartment building with a fair market value of $550,000 and subject to a mortgage of $125,000. The property transfers were made subject to the outstanding mortgages. What gain should Don recognize for 2008?
a 25,000
b 0
c 125,000
d 175,000
What I know:
Liability relief is treated as boot. Per Gleim - "Boot received includes cash, net liability relief, and other non qualified property (its FMV)."
In this case, an apartment worth 550,000 (FMV) was received, the old mortgage on the old apartment was removed from Don 100,000, and he received $25,000. Thus, value received is 675,000, of which $125,000 is boot.
In exchange, he gave up his basis in the apartment of 375,000 and assumed a mortgage on the new building of $125,000.
Therefore, gain realized is 675,000 - 500,000 = $125,000.
What I'd like to think:
Gain is recognized to either the lessor of boot received or gain realized. If boot received was (cash + liability relief) = $125,000 AND gain realized was that same figure, the answer ought to be (c).
The published answer is (a).
Why?
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annoyings
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| Posted: 10 Jul 2009 at 18:11 | IP Logged
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Net liability relief. Don was relieved of the 100,000 mortgage but
assumed the 125,000 mortgage on the new building. The only boot
received is the 25,000 cash.
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arushi_13
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| Posted: 10 Jul 2009 at 18:39 | IP Logged
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I think the rule is generally when the transferor exchanges a property subject to liab with another like kind property subject to mortgage
AND
If the liability assumed (125k)by the transferor (Here Don) >Liability assumed(100k) by the transferee, no gain will be recognized. The excess liability assumed does not reduce any cash received by the transferor( here 25k).
Hence, gain is recognized only to the extent of cash received which is 25k.
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arushi_13
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If however the liability assumed by the transferor( Here Don e.g. 10k) < Liability assumed by transferee(lets assume it to be 40k) and in addition to that cash would be received by transferor (lets say 20k) then :
gain recognized = 40k - (10k+20k) = 10k.
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bryris
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| Posted: 10 Jul 2009 at 18:52 | IP Logged
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Thanks guys. Makes sense now.
My weakest points on this exam (now that I am running through it in its entirety are Gleim SU 11-14 (aka individual gross income, exclusions, deductions, tax procedures).
I am rock solid on all the law stuff and and scoring satisfactorily on the corp tax stuff.
I've got my work cut out for me between now and 7/23.
Thanks again, though. This makes sense.
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Topic: Like kind exchange
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