Number 13, last sentence first because this is a long one.
"How much gain, if any, should the taxpayer recognize on the exchange and what will be
the basis in the new property?"
Okay it says, "Gain recognized and basis for the real estate.
A taxpayer had an investment in real estate with an adjusted basis of 125,000 dollars
subject to a mortgage of 75.
When the property had a value of 375, it was exchanged for another parcel of land which
the tax payer is similarly holding for investment.
The other party's assuming the 75,000 mortgage in the exchange.
The land acquired has a fair value of 260 and is subject to a mortgage of 40."
So we had a mortgage of 75, we now have a mortgage of 40 which the tax payer is assuming.
�In addition, the tax payer's receiving a recreational vehicle with a fair value of
30 and 50,000 in cash.� So we're getting 30, vehicle, 50, cash, and it looks like net
debt relief, net debt relief of 75 minus 40 of 35.
So we're getting a bunch of boot.
Whoo-hoo, we like that boot.
That's 50 and 30 is eighty, 90, 100, 110.
Looks like we're getting 115 of boot.
Does everybody see that?
Again, we've got 30 fair value of a recreational vehicle plus 50,000 in cash plus net debt
relief of the difference between the 75 and the 40 which gives us 35.
Okay so let's come over here and see if we can figure out what goes where.
Alright so, let's use this setup.
Thank goodness we left it on the board and we'll see what happens.
Alrighty so, starting out here is says, fair market value of the new, it says, "We have
an investment in real estate with an adjusted base of 125 subject to mortgage of 75.
When the property had a fair value of 375, it was exchanged for another parcel of land
that they're holding.
The other parcel is assumed 75,000 in mortgage.
The land acquired has a fair value of 260.� Fair value 260.
But we also have to look at what is our boot?
The boot is going to be the cash.
How much cash are we getting?
Looks like we're getting 50 of cash, looks like we're getting 30 of a new recreational
vehicle, and we've got net debt relief.
Our net debt relief is we owe 75, we're now going to owe 40 that means 35 is our net debt
relief, net debt relief.
So we're getting 50, 80, 90, 100, and 115.
So 115 is the boot that we are basically getting.
Now notice, watch how this works.
260 and 115 is 375, so I'm getting 375 and I'm giving 375 because the asset I'm giving
is worth 375.
So you said to me, "Hey I like that asset I'll take it however, you owe 75 on it and
it's worth 375 my properties only worth 260 and I owe 40 on it so I tell you what, I'll
kick in some cash and I'll kick in this extra, you know, weekend vehicle that I've got."
Yeah that sounds good.
So that's 375.
What was the book value of the old?
The book value of the old is adjusted basis 125.
Therefore, we're going to have a gain of 2 -- What is that?
250, so it's 375, I can't read my own writing, looks like 325, 375, 125, and 250.
Now, what are we going to do?
We're going to book this for the lower of the 250 which is your gain or the boot received.
Now in this case, how much boot did we get?
115 so realized gain is 250 but we're only going to recognize the lower of this or this
which is 115.
Alright, what does our journal entry look like?
Get rid of the old 125, we're going to go ahead and get rid of the, let's see, we've
got the old mortgage, old and that old mortgage was 75, we got cash of 50, we got the new
recreational vehicle of 30, we also have the old we got rid of.
We got this, we got this.
We got rid of the old mortgage, oh.
Where's our new mortgage?
We have a new mortgage of how much is it?
40, we just hit a gain of 115, so the difference is going to be how much the new asset should
be and in this case, the new asset should be 125.
So, in looking at this, we're going to have to say, boom, let's see it again.
Get rid of the old, we're going to get rid of the old mortgage.
We're going to set up a new mortgage.
We've got cash, we've got recreational vehicle.
We've also have the gain and the gain is going to be the recognized gain, the lower of the
realized gain or the boot received therefore, this is our plug, 125.
So the question says, "What is the gain recognized?"
115, what is the basis for the new?
125, that's a little tricky.
You do need to practice that because it does show up.