Question

Carlton holds undeveloped land for investment. His adjusted basis in the land is $200,000, and the FMV is $325,000. On November 1, 2018, he exchanges this land for land owned by his son, who is 31 years old. The appraised value of his son’s land is $320,000 with a basis of $310,000.

1.Calculate Carlton’s realized and recognized gain or loss from the exchange with his son and on Carlton’s subsequent sale of the land to a real estate agent on July 19, 2019, for $375,000.



2.Calculate Carlton’s realized and recognized gain or loss from the exchange with his son if Carlton does not sell the land received from his son, but his son sells the land received from Carlton on July 19, 2019. Calculate Carlton’s basis for the land on November 1, 2018, and July 19, 2019.



3. What could Carlton do to avoid any recognition of gain associated with the first exchange prior to his sale of the land?

Answer 1

A.

	Carlton	Son
Amount received	$320,000	$325,000
Basis	200,000	310,000
Realised gain	120,000	15,000

Since the land was sold within 2 years, the deferred gain would be recognised in the year of the subsequent sale. The Adjusted basis of the land held by Carlton is $200,000(320,000-120,000). Thus, not ony must Carlton recognise the gain on sale ($55,000), but also the gain on the original property on exchange ($120,000) for a total gain recognised of ($175,000). The son must also recognise the $15,000 previously deferred gain.

Realised gain on exchange $120,000

Total recognised gain. $175,000

B. If either party disposes of the property within 2 years, both previously deferred gains are recognised.

Carlton's Basis $200,000

( On nov 1 when the like -kind exchange was still good)

Since the gain is recognised now, his basis would go up to $320,000

(What he gave up or the basis of the old of $200,000 plus the gain of $120,000).

C.

Wait two years before any sale is made by either himself or his son.

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All the best