Firm M exchanged an old asset with a $14,600 tax basis and a $35,000 FMV for a new asset worth $25,500 and $9,500 cash. If the exchange is nontaxable, compute Firm M's realized and recognized gain and tax basis in the new asset. How would your answers change if the new asset were worth only $14,000, and Firm M received $21,000 cash in the exchange?

Question

Business

Katie Oneal

21 September, 04:09

Firm M exchanged an old asset with a $14,600 tax basis and a $35,000 FMV for a new asset worth $25,500 and $9,500 cash. If the exchange is nontaxable, compute Firm M's realized and recognized gain and tax basis in the new asset. How would your answers change if the new asset were worth only $14,000, and Firm M received $21,000 cash in the exchange?

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Answers (1)

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Mueller · Answer 1

a. Recognized gain = $ 0

b. Taxes basis = 14.000

Explanation:

a) Solution : - If the exchange is non-taxable : -

Realized gain = 35.000 - 14.600 = $ 20.400.

Recognized gain = $ 0. (The exchange situation falls / comes in the ambit of Section 1031 of IRS Code.)

Tax basis in the new asset = 14600 + 9500 = $ 24100.

Question b). Solution : -

Realized gain = 14000 + 21000 - 14600 = $ 20400.

Recognized gain = $ 20400 (Lesser of realized gain or boot received i. e., lesser of $ 20400 or $ 21000)

Tax basis in the new asset = 14600 + 20400 - 21000 = $ 14000.