Elvira owns an office building, and Jared Partnership owns an apartment building. Each property is encumbered by a mortgage. Elvira and Jared Partnership agree to exchange their properties and mortgages, with any difference to be paid in cash. The fair market values, mortgages, and adjusted bases for the properties are as follows:
Jared Partnership
Elvira’s Building Building
Fair market value $ 220,000 $ 250,000
Mortgage debt 80,000 150,000
Adjusted basis 100,000 175,000
- Write a letter to Elvira explaining who will have to pay cash to complete the exchange, the amount of her gross selling price, and the amount of gain or loss she will realize on the exchange.
- Write a letter to Jared Partnership explaining who will have to pay cash to complete the exchange, the amount of the gross selling price of its property, and the amount of gain or loss it will realize on the exchange
Elvira’s Jared Partnership
Building Building Difference
Fair market value $ 220,000 $ 250,000 $ 30,000
Mortgage debt (80,000) (150,000) (70,000)
Equity in building $ 140,000 $ 100,000 $ (40,000)
Jared Partnership will need to pay Elvira $40,000 cash to complete the exchange. Elvira realizes a gross selling price of $220,000:
Cash received from Jared $ 40,000
Value of building received 250,000
Mortgage assumed by Jared 80,000
Less: Assumption of Jared’s mortgage (150,000)
Gross selling price $ 220,000
Elvira’s gain realized on the exchange is $120,000:
Gross selling price $ 20,000
Less: Adjusted basis (100,000)
Realized gain $ 120,000
Jared Partnership will need to pay Elvira $40,000 to complete the exchange. Jared realizes a gross selling price of $250,000:
Value of land received $ 220,000
Mortgage assumed by Elvira 150,000
Less: Assumption of Elvira’s mortgage (80,000)
Less: Cash paid to Elvira (40,000)
Gross selling price $ 250,000
Jared’s gain realized on the exchange is $75,000:
Gross selling price $ 250,000
Less: Adjusted basis (175,000)
Realized gain $ 75,000
