[Anonymous]

On October 1, 2012, Donald Anderson exchanged an apartment
building having an adjusted basis of $375,000 and subject
to a mortgage of $100,000 for $25,000 cash and another apartment
building with a fair market value of $550,000 and subject to
a mortgage of $125,000. The property transfers were made subject
to the outstanding mortgages. What amount of gain should
Anderson recognize in his tax return for 2012?
a. $0
b. $ 25,000
c. $125,000
d. $175,000

Answer is (B) 25,000

I thought the answer is 0. I thought with two mortgages, we take the mortgages relieved of (100,000) less mortgage assumed (125,000) to get gain recognized. Since its negative here, we would recognize 0.

What am I missing here?

[A1lessio]

Hey,

For a like kind exchange you have to recognize the LESSER OF boot received or gain realized.

So in this example Anderson received $25,000 cash which he must recognize. I think a good rule of thumb is boot is always recognized, but make sure to calculate realized gain.

The mortgages are not relieved or assumed they just reduce the basis of each building. It comes out to a realized gain of $175,000. $450,000 (25k cash + 550,000 FMV – 125,000 mortgage) – $275,000 (375,000-100,000 mortgage)

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[Msbeekie]

Realized and “Recognize” are different. You only “recognize” gain on like-kind exchanges to the extent of boot/loot. Thus, $25k was the loot/boot recognized.

[Msbeekie]

Also the loot was less than the realized gain.

[Author]

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