Boot COPY Flashcards
Peyton has a warehouse used in his business. He exchanges it for a storage building owned by Eli. (Peyton and Eli are unrelated). The basis of Peyton’s asset is $40,000 and he gives Eli $20,000 cash plus the asset in exchange for Eli’s asset, which is worth $36,000. Eli’s basis in his original asset is $10,000. What is Eli’s gain or loss? A $20,000 gain recognized. B $26,000 gain realized and recognized. C $0 gain recognized. D $0 loss recognized
Solution: The correct answer is A. Eli must recognize gain to the extent of the boot paid to him ($20,000) limited by his potential gain. Note: only real property is eligible for like kind treatment. Peyton Before Exchange After Exchange (Old Property) (New Property) FMV $16,000 FMV $36,000 Basis 40,000 New Basis 60,000 Potential Loss $24,000 Potential Loss $24,000 Boot $20,000 to Eli Peyton adds boot paid to old basis to get new basis. Eli Before Exchange After Exchange (Old Property) (New Property) FMV $36,000 FMV $16,000 Basis 10,000 Carryover Basis 10,000 Potential Gain $26,000 Potential Gain $6,000
