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Lindsey exchanges investment real estate parcels with Donna. Her adjusted basis in the property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is the amount of gain recognized by Lindsey?

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Answer:

$500,000

Explanation:

For Lindsey, the cost incurred in the acquisition of Donna's property via the exchange is

= $400,000 + $200,000

= $600,000

For Donna, the cost incurred in the acquisition of Lindsey's property via the exchange is

= $1,000,000 + $100,000

= $1,100,000

If no cash is exchanged, amount of gain recognized by Lindsey

= $1,100,000 - $600,000

= $500,000

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