Walters owns land with a tax basis of $125,000 but a value of $160,000. This land is traded for like-kind land with a value of $150,000.To even up the trade, cash of $10,000 is also received by Walters. What taxable gain should Walter’s report on the exchange in filing his federal income taxes
Question
Walters owns land with a tax basis of 160,000. This land is traded for like-kind land with a value of 10,000 is also received by Walters. What taxable gain should Walter’s report on the exchange in filing his federal income taxes
Solution
In the United States, the tax code allows for like-kind exchanges to be tax-free under Section 1031. However, the receipt of cash or other non-like-kind property, also known as "boot," can trigger a taxable gain.
Here's how to calculate the taxable gain:
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Determine the amount of boot received. In this case, Walters received $10,000 in cash.
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Calculate the realized gain. This is the difference between the fair market value of what was received and the adjusted basis of what was given up. In this case, Walters received property worth 10,000, for a total of 125,000. So, the realized gain is 125,000 = $35,000.
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The taxable gain is the lesser of the realized gain or the boot received. In this case, the taxable gain is the lesser of 10,000 (boot).
So, Walters should report a taxable gain of $10,000 on his federal income taxes.
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