AICPA CPA-Regulation Exam - Topic 2 Question 24 Discussion

Choice 'b' is correct. $17,000 is the tax basis in the van.

The basis for like-kind exchanges is computed as follows:

The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.

Choice 'a' is incorrect. Basis must be reduced by non-like-kind assets (boot) received.

Choice 'c' is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above.

Choice 'd' is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.