CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsMedium
A client, Ms. Chen, exchanged her old business vehicle (adjusted basis $20,000, FMV $25,000) for a new business vehicle with a fair market value of $30,000. She also paid $5,000 in cash. What is Ms. Chen's recognized gain or loss on this exchange?
- A$5,000 gain
- B$10,000 gain
- C$0
- D$5,000 loss
Show answer & explanationAnswer & explanation
Correct answer: C. $0
In a like-kind exchange, gain or loss is generally not recognized unless boot is received. Ms. Chen paid boot (cash), she did not receive it, so no gain is recognized. The realized gain is postponed.
Why the other options are wrong
- A. Incorrect. This would be the realized gain, but it's not recognized when boot is paid.
- B. Incorrect. This overstates the realized gain and is not recognized.
- D. Incorrect. There is no recognized loss in this scenario.
Like-Kind Exchange (Boot Paid)
When a taxpayer pays cash (boot) in a like-kind exchange, gain or loss is generally not recognized, but the basis of the new asset is increased by the boot paid.
- No gain recognized if boot is paid, only if received.
- Basis of new property increases by boot paid.
- Realized gain or loss is deferred until the new property is sold.
Memory trick: Boot Received, Gain Seen; Boot Paid, Gain Laid (aside)