Several years ago, Agnes and Wyman Booth bought a home for 00,000. They lived in the home for te

Step 1: Determine the original purchase price of the home. The Booths bought the home for $200

Several years ago, Agnes and Wyman Booth bought a home for...

Several years ago, Agnes and Wyman Booth bought a home for $$\$200,000$$. They lived in the home for ten years and then moved into an apartment. Unable to immediately sell the home, they rented it for two years earning $$\$ 24,000$$ in rents and taking $$\$ 14,000$$ in depreciation. After the two rental years, the Booths exchanged the house for $$\$ 30,000$$ cash and a duplex worth $$\$ 600,000$$. The Booths will hold the duplex as rental property. How much taxable income do the Booths have from the exchange?

Key Concepts

Like-Kind Exchange

A like-kind exchange is a tax-deferred transaction that allows a taxpayer to defer recognition of capital gains and related taxes by swapping property held for business or investment into similar property. The key requirement is that the exchanged properties be of the same nature or character, even if they differ in grade or quality, thus allowing investors to reposition their portfolios without an immediate tax penalty.

Boot

Boot refers to any additional non-like-kind property or cash received in a like-kind exchange that does not qualify for tax deferral. When boot is received, the amount of boot is typically recognized as taxable gain in the year of the exchange, thereby reducing or eliminating the tax deferral benefits of the transaction.

Depreciation Recapture

Depreciation recapture is the process of taxing the gain that is attributable to prior depreciation deductions on property when that property is sold or exchanged. This recaptured gain is generally taxed at a higher rate as ordinary income rather than at the capital gains rate, reflecting the benefit previously received through accelerated depreciation deductions.

Adjusted Basis

Adjusted basis is the original cost of a property, modified by factors such as depreciation deductions, improvements, and other adjustments over time. The adjusted basis is crucial for determining the gain or loss realized on the disposition or exchange of property because it represents the taxpayer's actual investment in the asset after accounting for these modifications.

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