Taxation

Cardinal Properties, Inc., exchanges real estate held for investment plus stock for real estate to be held for investment. The stock transferred has an adjusted basis of $30,000 and a fair market value of $35,000. The real estate transferred has an adjusted basis of $40,000 and a fair market value of $112,000. The real estate acquired has a fair market value of $147,000.

a. What is Cardinal’s realized gain or loss?

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b. Its recognized gain or loss?

c. The basis of the newly acquired real estate?

Normandy Company owns Machine A (adjusted basis of $12,000; fair market value of $18,000), which it uses in its business. Normandy is considering two options for the disposal of Machine A. Under the first option, it will transfer Machine A and $3,000 cash to Joan, a dealer, in exchange for Machine B (fair market value of $21,000). Under the second option, Normandy will sell Machine A for $18,000 to Tim, another dealer, and then purchase Machine B from Joan for $21,000. Machines A and B qualify as like-kind property.

a. Calculate Normandy’s recognized gain or loss and the basis of Machine B under the first option.

b. Calculate Normandy’s recognized gain or loss and the basis of Machine B under the second option.

c. Advise Normandy on which option is preferable.

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