Question

Oliver has been a CPA for 30 years and wants to retire from his practice and purchase a farm. Oliver's office building is worth $600,000. His adjusted basis in the building is $180,000. He wants to acquire “Green Acres” farm land worth $500,000. The owner of Green Acres has agreed to include farm equipment into the transaction that is worth $100,000 in exchange for the office building. (Oliver does not plan on living at the farm.) 1.) Does this transaction qualify for like-kind exchange treatment? What property is like- kind? Is there any part of this transaction that is not like-kind property? 2.) Calculate Oliver's Recognized gain. 3.) Calculate Oliver's Basis in the new farm land. 4.) Calculate Oliver's Basis in the new farm equipment.

Answer 1

1) The exchange of farm only qualifies for like kind property exchange. Like kind propert is propert of similar kind that may be exchnaged without creating any tax liablity. Since one property, office building, purchased for investment is being exchanged for another property, farm, for investment this is considered like kind exchange and there will be no tax liability. Farm equipment is not like kind property in this exchnage

2) Recognised gain = Total gain - gain deferred = 420000 - 320000 = 100000

3) Bais in farmland = basis in farmland - gain deferred on exchange = 500000 - (50000 - 180000) = 180000

4) Basis in farm equipment = 100000