CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsMedium
A client, Ms. Davis, exchanges a business vehicle (adjusted basis $15,000, FMV $20,000) for a new business vehicle (FMV $25,000) and receives $5,000 in cash. What is Ms. Davis's recognized gain on this like-kind exchange?
- A$15,000
- B$5,000
- C$0
- D$10,000
Show answer & explanationAnswer & explanation
Correct answer: B. $5,000
In a like-kind exchange, gain is recognized to the extent of boot received. Ms. Davis received $5,000 in cash (boot). The realized gain is FMV of new vehicle + Cash received - Adjusted Basis of old vehicle = $25,000 + $5,000 - $15,000 = $15,000. However, recognized gain is limited to the boot received, which is $5,000.
Why the other options are wrong
- A. This represents the total realized gain, but not the recognized gain, which is limited by boot.
- C. This would be true if no boot was received or if the realized gain was less than or equal to zero.
- D. This is the difference between the FMV of the old vehicle and its adjusted basis, not the recognized gain.
Like-Kind Exchange (Boot Received)
In a like-kind exchange, if a taxpayer receives 'boot' (non-like-kind property, typically cash), gain is recognized to the lesser of the realized gain or the fair market value of the boot received.
- Like-kind exchanges generally defer gain/loss.
- Boot received triggers gain recognition.
- Recognized gain is limited to the amount of boot received.
Memory trick: Boot's the limit for your recognized gain.