I need help with this problem Problem 13-78 (LO. 6, 9) Tom Howard and Frank Pete
ID: 2594132 • Letter: I
Question
I need help with this problem
Problem 13-78 (LO. 6, 9) 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 "O". a. Frank's recognized gain is ,and Tom's recognized gain is b. Frank's adjusted basis is s , and Tom's adjusted basis is 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. The tax consequences to Tom produce a recognized gain of 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 19, 2016 (Tom acquired his 25-acre parcel on February 15, 2008). Tom's Social Security number is 123-45-6789Explanation / Answer
a. Calculation of Frank's gain =(Market Value of the property acquired) - (adjusted basis in the property given + Liability assumed) = (92,000) - (52,000 + 12,000) = $28,000.
gain of Tom = (Market value of property acquired + Liability assumed by Frank) - (Adjusted basis in property given)
= 80,000 + 12,000 - 60,000 = $32,000
However, out of total relaised gain of $32,000 only gain of $12,000 is recognized and taxable.
b. Adjusted basis of Frank is the market value of the acquired property $92,000.
Adjusted basis of Tom is the market value of property acquired plus any liabllity assumed by Frank i.e $80,000 + 12,000 = $92,000
c. Liabilities assumed in an exchange are treated as cash equivalents (boot). The taxpayer who assumes the liability, or gets property subject to a liability, is the one who owns the boot. Therefore, recognized gain in case of cash payment will be same as in part 1.