Leon exchanges an office building which he held as investment property for a bowling alley. His office building has a basis of $175,000 and a fair market value of $160,000, and it is subject to a mortgage of $40,000. The fair market value of the bowling alley is $120,000. The owner of the bowling alley will assume Leon's debt on the office building.

a. Is this a like-kind exchange? Explain.

b. What is Leon's realized gain or loss on the office building?

c. How much of the realized gain or loss is recognized on the exchange?

d. What is the character of the recognized gain or loss?

e. How much of the realized gain or loss is deferred?

f. What is the basis of the bowling alley acquired in the exchange?

According to Section 1031 of Internal Revenue Code, an exchange of like-kind property is referred to as like-kind exchange, if the exchange meets the following criteria:

The property should be exchanged only for the 'like-kind' (same class) property. The 'like-kind' property that is in exchange should be either used in operations of business or held for investment purposes. The exchange should be done under specific timing restrictions or requirements (for indirect exchanges through third parties).

Explanation:

A) Explanation: Since both the properties in exchange are real properties which are used in business, this is a like-kind exchange

B)

Description Amount ($)

Fair market value of bowling alley 120,000

Add: Mortgage value L is relieved off 40,000

Amount reali7ed 160,000

Less: Adjusted basis (175:000)

Realized loss by L (15,000)

C) Explanation: Since the loss realized is due to exchange, the loss is not recognized.

D) Explanation: Since the loss is not recognized, the character of gain or loss could not be

E) Explanation: The total of realized loss, $15,000 (From Requirement (b)) is deferred.

F) Determine the basis of property acquired in exchange, bowling alley.

Description Amount ($)

Fair market value of bowling alley 120,000

Add: Deferred loss 15,000

Basis of bowling alley 135,000