Question

please show work or explain how you got the answer

Lily exchanges a building she uses in her rental business for a building owned by Kendall. She will use the building in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

a. Lily's recognized gain is $50,000 and her basis for the building received is $170,000.

b. Lily's recognized gain is $0 and her basis for the building received is $120,000.

c. Lily's recognized gain is $0 and her basis for the building received is $170,000.

Answer 1

Solution:

Option b (Lily’s recognised gain is $0 and her basis for the building received is $120,000) is the correct answer.

Explanation:

Calculation Of Realised Gain
Particulars	Amount ($)
Fair Market Value	170000
The Adjusted Basis	120000
Realised Gain	50000
Recognised Gain	0

The exchange of building can be treated as a like-kind exchange. On a carryover basis, the adjusted basis for the building received will be amounting $120,000. If at all Kendall wants to sell the building within the time period of two years from the exchange date, Lily’s postponed gain amounting $50,000 as of the date of such early sale of the building would be recognized.