Calculations for "Realized Gain with Liability Assumed (Boot Paid) and Liability Relieved (Boot Received)"
Gain/Loss Realized: |
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Amount realized | = | Fair market value of new auto + Boot received - Boot paid - Adjusted basis of auto given up |
| = | $17,500 fair market value new auto + $3,500 in relieved liabilities (boot received) -
$1,000 in liabilities assumed (boot paid) $17,000 adjusted basis of the old auto
($35,000 cost - $18,000 accumulated depreciation) |
| = | $3,000 gain |
Gain/Loss Recognized: |
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Gain recognized | = | $2,500 [the lesser of realized gain of $3,000 or net relief from liabilities (boot received) of $2,500] |
Basis of New Property: |
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New basis | = | Adjusted basis of property given up + Gain recognized - Boot received + Boot paid |
| = | $17,000 + $2,500 - $3,500 + $1,000 |
| = | $17,000 |
Alternate calculation: $17,500 FMV new property - $500 deferred gain =
$17,000 basis of new property.
Choice "C" is correct. A $3,000 gain is realized on the transaction [fair market value of the new auto $17,500 + $3,500 in liabilities relieved - $1,000 in liabilities assumed - $17,000 adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation)].Choice "d" is incorrect. $2,500 is the gain
recognized, not
realized.
Choice "b" is incorrect. $500 would be the gain realized if the liabilities were ignored.
Choice "a" is incorrect. A $2,000 "loss" subtracts the $3,500 relief from liability (boot received) and adds the $1,000 liability assumed (boot paid) instead of adding the relief and subtracting the assumption of the liabilities.
