Problem 15-38 (LO. 2, 5)
Tom Howard and Frank Peters are good friends (and former college roommates). Each owns investment property in the other’s hometown (Tom lives in Kalamazoo, MI; Frank lives in Austin, TX). To make their lives easier, they decide to exchange the investment properties. Under the terms of the exchange, Frank will transfer realty (20 acres of unimproved land; adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty (25 acres of unimproved land; adjusted basis of $60,000; fair market value of $92,000). Tom’s property is subject to a mortgage of $12,000 that will be assumed by Frank.
If an amount is zero, enter “0”.
b. What are their adjusted bases?
Frank’s adjusted basis is $fill in the blank 01a88e015fb6072_1, and Tom’s adjusted basis is $fill in the blank 01a88e015fb6072_2.
c. As an alternative, Frank has proposed that rather than assuming the mortgage, he will transfer cash of $12,000 to Tom. Tom would use the cash to pay off the mortgage.
Complete an e-mail, advise Tom on whether this alternative would be beneficial to him from a tax perspective.
| Dear Tom: | |||||||||
| The alternative Frank has proposed would produce the following tax consequences: | |||||||||
|
|||||||||
| Because the cash is treated as boot, the recognized gain is the same as if Frank assumes the mortgage. Your adjusted basis for the realty received is $fill in the blank f15853ffcfedfd6_7. As a result, the tax consequences under Frank’s alternative proposal are the same as under the original proposal. | |||||||||
d. Assuming that Tom and Frank proceed with the original exchange (rather than the alternative), complete Form 8824 (Parts I and III) for Tom. Assume that the exchange occurs on September 16, 2018 (Tom acquired his 25-acre parcel on February 15, 2010). Tom’s Social Security number is 123-45-6789.
Enter all amounts as positive numbers. However, if required, use the minus sign to indicate a loss. If an amount box does not require an entry or the answer is zero, enter “0”.
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