Rita and Todd exchange real estate in a like-kind exchange.Rita's property is subject to a $40,000 mortgage and has a basis of $75,000 (fair market value of $112,000).She receives real estate with a fair market value of $72,000 and Todd assumes the mortgage.What is her recognized gain and adjusted basis for the real estate received?
A)$0;$75,000.
B)$37,000;$72,000.
C)$37,000;$75,000.
D)$40,000;$115,000.
E)None of the above.

Question

Quizplus · Accepted Answer

In a like-kind exchange, the mortgage is treated as part of the selling price. Therefore, Rita's realized gain is $72,000 (fair market value of real estate received) - $112,000 (fair market value of property given up) = -$40,000. Since the realized gain is negative, there is no recognized gain.

To calculate adjusted basis, we start with the original basis of $75,000 and subtract the mortgage assumed by Todd ($40,000) and add any additional costs incurred in the exchange. In this case, there are no additional costs, so adjusted basis is $35,000 ($75,000 - $40,000).

Rita and Todd Exchange Real Estate in a Like-Kind Exchange