Business K exchanged an old asset (FMV $92,000) for a new asset (FMV $92,000). B

Question

Business K exchanged an old asset (FMV $92,000) for a new asset (FMV $92,000). Business K’s tax basis in the old asset was $104,000.

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 $97,000 cash. How much gain or loss does Business K recognize if the exchange was taxable and How much gain or loss if the exchange was nontaxable

Explanation / Answer

1. If Exchange was a taxable transaction:

Realized loss = $92,000 amount realised - $104,000 tax basis = $12,000

Recognized loss = $12,000

Tax basis in new asset = $92,000 cost

2. If exchange was a non taxable transaction:

Realized loss = $92,000 amount realised - $104,000 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 = $5,000 ( $97,000 amount realized - $92,000 Tax basis)

If exchange was non taxable, loss recognized on sale of new asset = $7,000 ( $97,000 amount realized - $104,000 Tax basis)

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