Question

In 2019, Sue exchanges a sport-utility vehicle (adjusted basis of $16,000; fair market value of $19,500) for cash of $2,000 and a pickup truck (fair market value of $17,500). Both vehicles are for business use. Sue believes that her basis for the truck is $17,500. Is Sue correct? Why or Why not?

Answer 1

Answer :

No, Sue is not correct. The assumption on the basis of which she calculated adjusted basis is not correct.

Sue considers the transaction as a regular sale or exchange transaction and thus determined the adjusted basis accordingly treating it as a new property.

However, this transaction qualifies for nontaxable exchange treatment under § 1031 because sport utility vehicles and pickup trucks both are classified as light general-purpose trucks. The application of § 1031 is not elective, it is mandatory.

According to § 1031

Amount realized ($17,500 + $2,000)	19500
Adjusted basis	(16000)
Realized gain	$3500
Recognized gain (lesser of boot received or realized gain)	$2000

On receiving boot of $2000, the proportion of realized gain to the extent of boot received is recognized. Thus, the adjusted basis will be:

Fair market value	17500
Postpone gain (3500-2000)	(1500)
Adjusted basis	$16000