A farmer, Mr. Jensen, exchanged his old tractor (adjusted basis $30,000, FMV $40,000) for a new tractor (FMV $55,000) and paid $15,000 cash in the exchange. This qualifies as a like-kind exchange under §1031. What is Mr. Jensen's basis in the new tractor?
- A$55,000
- B$30,000
- C$40,000
- D$45,000
Show answer & explanationAnswer & explanation
Correct answer: D. $45,000
The basis of the new property in a like-kind exchange is generally the adjusted basis of the property given up, plus any boot given, plus any gain recognized, minus any boot received. In this case, Mr. Jensen gave boot ($15,000 cash) and received no boot. Since he gave boot, he recognizes no gain. Therefore, the basis in the new tractor is $30,000 (basis of old tractor) + $15,000 (cash given) = $45,000. Alternatively, the basis can be calculated as the FMV of the property received ($55,000) minus any deferred gain ($10,000 realized gain - $0 recognized gain = $10,000 deferred gain) = $45,000. Realized gain = FMV of new tractor ($55,000) - Basis of old tractor ($30,000) - Cash paid ($15,000) = $10,000. The realized gain is $55,000 (FMV of new) - ($30,000 (basis of old) + $15,000 (cash paid)) = $10,000. The basis calculation is (Adjusted Basis of Property Given Up + Boot Given + Gain Recognized - Boot Received) = $30,000 + $15,000 + $0 - $0 = $45,000. Or, (FMV of property received - Deferred Gain) = $55,000 - $10,000 = $45,000.
Why the other options are wrong
- A. This is the FMV of the new tractor, not its tax basis.
- B. This is the basis of the old tractor, not the new one.
- C. This is the FMV of the old tractor, which is irrelevant for basis calculation in this scenario.
Basis in Like-Kind Exchange (Boot Given)
When boot (e.g., cash) is given in a like-kind exchange, it increases the basis of the new property received. The basis of the new property is generally the adjusted basis of the property given up, plus any boot given, plus any gain recognized, minus any boot received.
- Boot given increases the basis of the property received.
- Boot given does not trigger recognized gain for the giver.
- The basis is adjusted to account for deferred gain or loss.
- Formula: Basis of old property + Boot given + Gain recognized - Boot received.
Memory trick: Basis is the 'B'alance of 'B'efore and 'B'oot.