You exchange a parcel of land with a building used for business purposes. You originally bought the land for $58,000 and paid $25,000 to construct the building. You have taken $20,000 depreciation on the building. In the exchange, you receive land with a fair market value of $60,000, machinery with a fair market value of $7,000, and cash of $1,000. You pay closing costs of $500 on the exchange.
Your amount you realize on the exchange is $67,500 ($60,000 fair market value of the land, plus $7,000 fair market value of the machinery, plus cash of $1,000 you receive minus $500 of exchange expenses you pay).
Your adjusted basis in the property you give up is $63,000 ($58,000 cost of the land plus $25,000 cost of the building, less $20,000 depreciation).
Your realized gain on the exchange is $4,500 ($67,500 amount realized minus $63,000 adjusted basis).
Your taxable gain on the exchange is $4,500 (which is the lesser of the overall gain realized on the exchange, and the amount of money and the fair market value of the unlike property you receive, which in this case would be a total of $7,500: cash of $1,000 received, less $500 in closing costs, plus $7,000 fair market value of machinery).
Your basis in the property received would be a total of $67,000 as follows:
Your total adjusted basis in the property you give up: $63,000
Plus your additional cost of $500 for closing costs
Plus the gain you recognized on the exchange: $4,500
Minus the money you received: $1,000
Of the total basis of $67,000, the amount allocated to the machinery you receive would be its fair market value of $7,000, and the balance of $60,000 would be allocated as the basis of the land you receive.
Example 2
You exchange a truck used for business purposes. You originally bought the truck for $35,000 and have taken $20,000 depreciation on the truck. In the exchange, you receive another truck with a fair market value of $16,000, machinery with a fair market value of $4,000, and cash of $750. You pay closing costs of $400 on the exchange.
Your amount you realize on the exchange is $20,350 ($16,000 fair market value of the truck, plus $4,000 fair market value of the machinery, plus cash of $750 minus $400 exchange expenses).
Your adjusted basis in the property you give up is $15,000 ($35,000 cost of the truck less $20,000 depreciation).
Your realized gain on the exchange is $5,350 ($20,350 amount realized minus $15,000 adjusted basis).
Your taxable gain on the exchange is $4,350 (which is the lesser of the overall gain on the exchange of $5,350 and the amount of money and the fair market value of the unlike property you receive, which in this case would be a total of $4,350: cash of $750 received, less $400 in closing costs, plus $4,000 fair market value of machinery).
Your basis in the property received would be a total of $19,000 as follows:
Your total adjusted basis in the property you give up: $15,000
Plus your additional cost of $400 for closing costs
Plus the gain you recognized on the exchange: $4,350
Minus the money you received: $750
Of the total basis of $19,000, the amount allocated to the machinery you receive would be its fair market value of $4,000, and the balance of $15,000 would be allocated as the basis of the truck you receive.