Calculations for "Recognized Gain with Liabilities Relieved (Boot Received)"
Gain/Loss Realized: |
|
|
Amount realized | = | Fair market value of new auto + Liabilities relieved (boot received) - Adjusted basis of auto given up |
| = | $17,500 fair market value new auto + $2,500 relief from liability - $17,000 adjusted
basis of the old auto ($35,000 cost - $18,000 accumulated depreciation) |
| = | $3,000 gain |
Gain/Loss Recognized: |
|
|
Gain recognized | = | $2,500 [the lesser of realized gain of $3,000 or $2,500 in liabilities relieved (boot received)] |
Basis of New Property: |
|
|
New basis | = | Adjusted basis of property given up + Gain recognized - Liabilities relieved (boot received) |
| = | $17,000 + $2,500 - $2,500 |
| = | $17,000 |
Alternate calculation: $17,500 FMV new property - $500 deferred gain =
$17,000 basis new property.
Choice "A" is correct. A gain of $2,500 is recognized on the transaction [the lesser of $3,000 gain realized and $2,500 in relief from the liability (boot received)].Choice "c" is incorrect. $3,000 is the amount of gain
realized, not
recognized.
Choice "d" is incorrect. $500 would be the gain/loss realized if the relief from the liability (boot received) of $2,500 was ignored. It still would not be the amount recognized.
Choice "b" is incorrect. Gain is recognized
to the extent of boot
received (in this case, liabilities relieved) in like-kind transactions.
