• Explanation

Exchanges of tangible business personal property Anything that is subject to ownership and is not considered real property (eg, movable or intangible things). (eg, delivery vans, equipment, furniture) do not qualify as like-kind exchanges (ie, eligible for deferral of gains and losses). Any gain or loss from exchanges of business use assets other than qualified real propertyReal property (eg, land, buildings) held for investment or used for business. (eg, office building, land, warehouse) is currently recognizedThe reportable gain or loss included in a taxable income calculation. It may differ from the realized gain or loss. (ie, taxable) (Choice A).

The gain or loss recognized is the difference between the FMVThe price of an item or service in an arm's length transaction that is dictated by a market of buyers and sellers. of the acquired asset plus any cash received and the adjusted basis of the asset given up plus any cash paid. Adjusted basis is cost less accumulated depreciation.

In this scenario, a company exchanged a delivery van with an adjusted basis of $100,000 ($150,000 − $50,000). In return, the company received a delivery van and cash totaling $125,000 ($120,000 FMV of delivery van + $5,000 cash). As a result, there is a $25,000 realized gain ($125,000 − $100,000 adjusted basis) on the exchange. Because the exchange does not qualify as a like-kind exchange, the $25,000 gain is recognized.

Note: Because the delivery van is a Section 1245 asset Tangible or intangible depreciable (or amortizable) personal property that is held for more than one year, used for investment or in a trade or business, and is not real property (eg, land, building)., the gain is reported as ordinary income (ie, recapturedThe recovery of ordinary income that was previously deducted as an allowance for depreciation (Section 1245 and 1250 property each have different limitations). Gains used to recapture depreciation are taxed as ordinary income.) to the extent of prior depreciation (ie, 50,000). Therefore, the $25,000 gain is taxed as ordinary income.

(Choice B) A recognized gain of $5,000 (the lesser of total cash received or the gain) erroneously treats the transaction as a like-kind exchange.

(Choice C) A $20,000 gain fails to include the $5,000 cash received when determining the recognized gain.

Things to remember:
Any gain or loss from exchanges of business use assets (eg, delivery van, equipment), other than qualified real property, is currently recognized (ie, taxable). The gain or loss recognized is the difference between the FMV of the acquired asset plus any cash received and the adjusted basis of the asset given up plus any cash paid.

Lecture References :

• REG 7.01 : Property Tax Transactions: Property Types: Ordinary, 1231, Capital Assets