[ankishah]

Vern owns farm acreage he inherited two years ago. There are no buildings or improvements to the land. He decides to perform an exchange and acquire two rental houses:

The Big Easy Farm:
Inherited Basis $451,739
Mortgage 0
Sale Price 769,633
Closing Costs 26,754


The Fixer House:
Purchase Price $625,000
Mortgage 400,000
Closing Costs 11,744
Cash from Accommodator 235,129
Cash required at Closing 1,615


The Money-Pit House:
Purchase Price $740,200
Mortgage 290,000
Closing Costs 14,329
Cash from Accommodator 464,700
Cash returned from Escrow $171


Required:
1. How much gain is taxable, if any?
2. What is the basis for the exchange properties before allocation? You should include a proof of your computations.
3. What are the allocated bases for The Fixer House and The Money-Pit House?

[andgus]

The United States federal realized gain is estimated to be $291,140. The recognized gain or tax is $43,671. If Vern is a resident of a state that assesses a capital gains tax, then this would need to be added to the tax due.

The net equity received at the sale of the farm or first leg closing is estimated to be $742,879.

$1,365,000 is the purchase price for the replacement properties with $699,829 of proceeds used towards the purchase and $26,073 of closing expenses and $690,000 of new debt.

Net equity from first leg sale is $742,879 and total equity used towards the purchase is $725,902 leaving a delta of $16,977 which is taxable at the long term capital gains rate dependent upon Vern's current year taxable income. If Vern is in the 10 or 15% tax bracket the long term rate may be 0%. If in any of the four upper income brackets, 15% is the long term rate through 2012 and increasing to 20% in 2013.

The net adjusted basis is $451,739 or the comparable price of the property when it was received.

The estimated allocated basis for the fixer upper is $512,242 and for the money pit house, $533,745.

625,000 – 11744 = 613,256
235,129 + 11,744 = 246,873
246,873/725,902 = 0.340091
0.340091 * 291,140 = 99,014
613,256 – 99,014 = 514,242

740,200 – 14,329 = 725,871
464,700 + 14,329 = 479,029
479,029/725,902 = 0.659909
0.659909 * 291,140 = 192,126
725,871 – 192,126 = 533,745

Please confirm with your CPA.