Question

This year, Neil Incorporated exchanged a business asset for an investment asset. Both assets had a $932,000 appraised FMV. Neil’s book basis in the business asset was $604,600, and its tax basis was $573,000. Three years after the exchange, Neil sold the investment asset for $1,000,000 cash. Required: Compute Neil’s book gain and tax gain on sale assuming Neil acquired the investment asset in a taxable exchange. Compute Neil’s book gain and tax gain on sale assuming Neil acquired the investment asset in a nontaxable exchange.

Answer 1

$31,600

Explanation:

Assuming the investment asset was acquired in a taxable exchange:

Book gain = Sale price - Book basis

= $1,000,000 - $932,000

= $68,000

Tax gain = Sale price - Tax basis

= $1,000,000 - $573,000

= $427,000

Assuming the investment asset was acquired in a nontaxable exchange:

Book gain = Sale price - Book basis - Deferred gain

= $1,000,000 - $932,000 - 0

= $68,000

Tax gain = Sale price - Tax basis - Deferred gain

= $1,000,000 - $573,000 - ($932,000 - $604,600)

= $99,400

Note that in a nontaxable exchange, the deferred gain is calculated as the book basis of the business asset minus the tax basis of the business asset, which is $604,600 - $573,000 = $31,600 in this case.