Question

In the current year Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain?

Answer 1

Answer:

The amount of Tatum's recognized gain is $50,000.00

Explanation:

Ordinarily,the gain would have been calculated by comparing the basis value of the asset given up deducted with the fair market value of asset acquired,but this is different situation entirely as an asset is exchanged for another of its kind.When such happens,no gain is calculated as it a mere giving up of an asset for similar asset,no difference whatsoever,no gain is envisaged.

The twist in this is that even though the assets are similar,but the value of mortgage received is higher than mortgage given up by $50000($120000-$70000), as a result,Tatum recorded a gain of $50,000.

Answer 2

Answer:

$50,000

Explanation:

Note that the exchange here is a business property for another business property.

i.e. farmland for office building.

The total consideration (amount) received by tantrum is $350,000 (i.e. the FMV) and the mortgage of $120,000 .

This amounts to $120,000 + $350,000

= $470,000.

The property given up was worth $250,000.

And there's a mortgage of $70,000 given up along with the property.

This amounts to $250,000 + $70,000

= $320,000

The realized gain = $420,000 - $320,000

Gain = $150,000

But the recognised gain which will be lesser than the total realised gain is calculated by

$120,000 - $70,000

= $50,000

This is so because the $120,000 of mortgage given up by a party and assumed by the other party is treated as boot received, and the $70,000 of mortgage assumed is treated as boot given up.

The $50,000 of boot received is the recognized gain.