Rule: Per IRC Section 1031, non-recognition treatment is accorded to a
like-kind exchange of property used in a trade or business. "Like-kind"
exchanges include exchanges of business property for business property, where
like-kind is interpreted very broadly and refers to the nature or character of
the property and not to its grade or quality.
Choice "a" is correct. The exchange in this question qualifies for Section
1031 treatment since the exchange appears to be business property for business
property. However, the boot involved in the exchange (the mortgages) must be
taken into account to determine the recognition or non-recognition of the gain
realized on the exchange. In this transaction, the total consideration received
by Tatum is the FMV of the property received of $350,000 plus the mortgage of
$120,000 that was assumed by the other party, for a total of $470,000. The
adjusted basis of the property given up was $250,000, and there is also $70,000
of mortgage given up by the other party (and assumed by Tatum), for a total of
$320,000. The realized gain is thus $470,000 - $320,000 = $150,000. The
recognized gain will be the lesser of realized gain or net boot received. The
$120,000 of mortgage given up (and assumed by the other party) is treated as
boot received, and the $70,000 of mortgage assumed is treated as boot given up.
The net is $50,000 of boot received. The $50,000 of boot received is the
recognized gain. The treatment is somewhat the same as if cash/boot had been
received in the transaction.
Choice "b" is incorrect. The $100,000 is the amount of realized gain being
deferred, not the recognized gain.
