Question

Baker traded a building used in her business for some new land. Baker originally purchased the building for $50,000 and it had an adjusted basis of $30,000 at the time of the exchange. The new land had a fair market value of $35,000. Baker also paid $5,000 to the dealer in the transaction. What is Baker's adjusted basis in the land after the exchange?

Answer 1

Answer:

The adjusted basis in the land after the exchange=-$10,000, meaning Baker realized a loss of $10,000 from the exchange

Explanation:

Step 1: Determine the initial loss/gain in value of the building

initial loss/gain=original purchase price-adjusted basis

where;

original purchase price=$50,000

adjusted basis=$30,000

replacing;

initial loss/gain=50,000-30,000=$20,000

initial loss in value=-$20,000

Step 2: Determine the loss or gain from the exchange

loss/gain=35,000-30,000=$15,000

gain=$15,000

Step 3: Determine other additional costs

Costs=loss=-$5,000

Step 4: Determine the net gain/loss

net gain/loss=-20,000+(15,000)+(-5,000)=-$10,000

The adjusted basis in the land after the exchange=-$10,000, meaning Baker realized a loss of $10,000 from the exchange