CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsMedium
A taxpayer exchanges undeveloped land with an adjusted basis of $100,000 and a fair market value (FMV) of $150,000 for another parcel of undeveloped land with an FMV of $140,000 and $10,000 cash. This qualifies as a §1031 like-kind exchange. What is the taxpayer's recognized gain on this exchange?
- A$50,000
- B$40,000
- C$0
- D$10,000
Show answer & explanationAnswer & explanation
Correct answer: D. $10,000
In a like-kind exchange, gain is recognized to the extent of boot received. Boot received is generally cash or non-like-kind property. Here, the taxpayer received $10,000 cash. The total gain realized is $150,000 (FMV of land received + cash received) - $100,000 (adjusted basis) = $50,000. However, the recognized gain is limited to the boot received, which is $10,000.
Why the other options are wrong
- A. This represents the total realized gain, not the recognized gain, which is limited by boot received.
- B. This is the FMV of the land received minus the basis, ignoring the boot received.
- C. This would be true if no boot was received or realized gain was zero.
Like-Kind Exchange (Boot)
A tax-deferred exchange of real property for other real property of a like-kind. 'Boot' is non-like-kind property (e.g., cash) received, which triggers recognition of gain up to the amount of boot or realized gain, whichever is less.
- Gain is generally deferred, not eliminated.
- Boot received triggers recognized gain.
- Recognized gain is the lesser of boot received or realized gain.
- Boot given does not trigger recognized gain for the giver.
Memory trick: Boot is the 'B' for 'Brought' cash that's taxable.