Question

Business K exchanged an old asset (FMV $95,000) for a new asset (FMV $95,000). Business K’s tax basis in the old asset was $107,000. Compute Business K’s realized loss, recognized loss, and tax basis in the new asset assuming the exchange was a taxable transaction. Compute Business K’s realized loss, recognized loss, and tax basis in the new asset assuming the exchange was a nontaxable transaction. Six months after the exchange, Business K sold the new asset for $100,000 cash. How much gain or loss does Business K recognize if the exchange was taxable? How much gain or loss if the exchange was nontaxable?

Answer 1

Answer:

All requirements solved

Explanation:

A realized loss is the loss that is recognized when assets are sold for a price lower than the original purchase price

1.If Exchange was a taxable transaction:

Realized loss = $95,000 amount realised - $107,000 tax basis = $12,000

Recognized loss = $12,000

Tax basis in new asset = $92,000 cost

2.  If the exchange was a non-taxable transaction:

Realized loss = $95,000 amount realised - $107,000 tax basis = $12,000

Recognized loss = $0

Tax basis in new asset = $104,000 substituted basis

3. If exchange was taxable,

Gain recognized on sale of new asset = ( $100,000 amount realized - $95,000 Tax basis)

Gain recognized on the sale of new asset = $7,000

If exchange was non taxable,

loss recognized on sale of new asset = $100,000 amount realized - $107,000 Tax basis

loss recognized on sale of new asset = $7,000