Boot: Recognized Gain in Like-Kind Exchange

Course: Income Tax Planning
Lesson 16: Property Transactions Without Gain or Loss Recognition

Student Question:

Hello-

Melvin gave $40,000 in cash plus real property with an adjusted basis of $30,000 (fair market value of $100,000) and received real property with a fair market value (FMV) of $150,000. In this transaction, Melvin would have no recognized gain, even though he realized a gain of $80,000. 

So, I’m totally lost here on how this makes sense. There is no recognition of loss or gain unless the boot given has a difference between its adjusted basis and FMV? The FMV of this transaction is $100,000, and the adjusted basis for this property is $30,000, yet somehow there is no recognition of gain or loss. Furthermore, does this mean that Melvin’s giving here (the property and cash) is less than the $100,000 worth? But since he got $150,000 for it all he had an $80,000 realized gain? 

Thanks

Sam


Instructor Response:

Hi Sam,

This can be confusing. A taxpayer who gives boot (unlike property) in a like-kind exchange will not recognize a gain, even if the taxpayer realizes a gain in the like-kind exchange. 

  • The relationship between the FMV of the boot given and the income tax basis of the boot given is irrelevant in a like-kind exchange.
  • However, had the boot property been sold in an ordinary sale (not a like-kind exchange), the seller would recognize a gain to the extent the sales price exceeded the seller’s income tax basis.   

A taxpayer who gives boot will not recognize a gain. Only taxpayers who receive boot AND realize a gain in the like-kind exchange transaction will recognize gains. The receiver of the boot recognizes gain at the smaller of the fair market value of the boot received or the realized gain.  

Let me know how fully this addresses your question.

Onward and Upward,
Bruce