Tom Howard and Frank Peters are good friends (and former college roommates). Each owns investment property in the other’s hometown (Tom lives in Kalamazoo, MI; Frank lives in Austin, TX.). To make their lives easier, they decide to exchange the investment properties. Under the terms of the exchange, Frank will transfer realty (20 acres of unimproved land; adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty (25 acres of unimproved land; adjusted basis of $60,000; fair market value of $92,000). Tom’s property is subject to a mortgage of $12,000 that will be assumed by Frank.
a. What are Frank’s and Tom’s recognized gains?
b. What are their adjusted bases?
c. As an alternative, Frank has proposed that rather than assuming the mortgage, he will transfer cash of $12,000 to Tom. Tom would use the cash to pay off the mortgage. Advise Tom on whether this alternative would be beneficial to him from a tax perspective.
d. Assuming Tom and Frank proceed with the original exchange (rather than the alternative), complete Form 8824 (Parts I and III) for Tom. Assume that the exchange occurs on September 19, 2016 (Tom acquired his 25-acre parcel on February 15, 2008). Tom’s Social Security Number is 123-45-6789.