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need clarification regarding boot offsetting liability


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#1 midnightlover

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Posted 28 December 2013 - 02:25 AM

in wiley regs study guide, it states that "boot given in the form of an assumption of a liability does not offset boot received in the form of cash or unlike property; however, boot given in the form of cash or unlike property does offset boot received in the form of a liability assumed by the other party."

 

these are the facts in the example that wiley uses:

- A owns investment land with adjusted basis of $50,000 & FMV of $70,000, subject to $15,000 mortgage

- B owns investment land with adjusted basis of $60,000 & FMv of $65,000, subject to $10,000 (part 1)/$6,000 (part 2) mortgage

- A & B exchange real estate investments with A assuming B's mortgage and B assuming A's mortgage

- A pays B cash of $4,000 (part 2)

 

in part 1 of the example:  A has a $20,000 gain realized, but only $5,000 recognized and a basis on new investment of $50,000.  B has a $5,000 gain realized, but $0 gain recognized and a basis of $65,000 on new investment.  i understand this part.

 

however, in part 2 of the example, the mortgage on B's investment land is now $6,000 and B receives $4,000 in cash from A.  wiley does not explain how it calculates that B must recognize a gain of $4,000 and will have a basis of $69,000 for new investment or that the tax effects to A remain unchanged.  can someone help me by breaking down the calculations.  for B i can get the math to work, but i'm not sure of the reasoning: 

 

$70k FMV + $6k boot rec'd + $4k cash boot = $80k realized on exchange

$80k realized - $60k basis - $6k boot rec'd = $14k gain realized

$14k gain realized - $10k boot given = $4k gain

 

sorry if this is an easy problem.  :x



#2 amitpatil83

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Posted 28 December 2013 - 04:57 AM

Hi,

 

(1) If liabilities are assumed on both sides of the exchange, they are offset to determine the net amount of boot recd./given.

 

So in case 1 we recognized gain lesser of :

       

             > Difference in liabilities.(5K....for A)

             > Realized gain (20K.........For A)

 

 (2) In case where liabilities as well as cash is transferred recognized gain would be lesser of :

 

             > Cash received (4K.. for B

             > Realized gain (5K....for B

 

 So, only 4K is recognized which is added to the 60K + 15K - 10K + 4K = 69K

 

p.s. : refer to the MCQ's # 20 & 21 of Wiley's for further clarification. 


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#3 michellepriscilla

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Posted 05 March 2014 - 08:30 PM

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