Question: Aaron sells property with a basis of $300,000 and a FMV of $800,000. In the...
Question:
Aaron sells property with a basis of $300,000 and a FMV of $800,000. In the sale, he incurs $100,000 of selling expenses. He receives a $400,000 note, $100,000 installments from year 1 through 4. He also receives like-kind property of $400,000. He also has $200,000 depreciation recapture inherent in the property. How much income in year 1 will be counted as capital gain?
I can get this far:
Gross profit is $400,000 ($800,000 amount realized - $300,000 adjusted basis - $100,000 selling expenses).
$200,000 is depreciation recapture, thus $200,000 is recognized as ordinary income in year 1 and then recalculate the revised gross profit of $200,000 ($800,000 AR - $600,000 AB [$400,000 + $200,000 recapture]).
I am not sure what to do next. I know I have to do something with the like-kind property, but I am having trouble. The answer is $50,000, but I am having trouble as to why that is. Any help would be appreciated. Thanks!
Homework Answers
The answer should be $400000. Basis is $300000. Sale value is $800000. Sale expenses = $100000. Capital gains = $800000 - 100000 - 300000 = $400000. Depreciation recapture amount actually will be $400000 irrespective of the amount inherent in the property. The entire $400000 will be counted as capital gain.
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