You trade equipment in 2010 and pay a $10,000 cash boot for similar equipment with a fair market value of $20,000. The transaction cost is $100. You paid $25,000 for your old equipment. The depreciation deduction allowed for tax purposes on the old equipment was $4,000 in 2007, $5,500 in 2008, and $7,000 in 2009. What is the basis of the equipment that you acquire in the trade?
To calculate the basis of the equipment acquired in the trade, you need to take into account the cash boot paid, the fair market value of the new equipment, and the adjusted basis of the old equipment. Let's break down the steps:
1. Start with the adjusted basis of the old equipment: $25,000 - $4,000 (depreciation in 2007) - $5,500 (depreciation in 2008) - $7,000 (depreciation in 2009) = $8,500. This is the adjusted basis before the trade.
2. Calculate the realized gain on the old equipment: Fair market value of the new equipment ($20,000) - adjusted basis of the old equipment ($8,500) = $11,500. This is the realized gain.
3. Determine the amount of boot paid: In this case, the cash boot paid is $10,000.
4. Calculate the recognized gain: The lesser of the realized gain or the amount of boot paid is recognized as gain. In this case, the recognized gain is $10,000.
5. Calculate the basis of the new equipment: The basis of the new equipment is the sum of the recognized gain and the transaction costs. In this case, $10,000 (recognized gain) + $100 (transaction costs) = $10,100.
Therefore, the basis of the equipment acquired in the trade is $10,100.
To calculate the basis of the equipment acquired in the trade, you will need to consider the original cost of your old equipment, any depreciation deductions taken, and the cash boot paid.
Here is the step-by-step calculation:
1. Start with the original cost of your old equipment: $25,000.
2. Subtract the depreciation deductions allowed in prior years:
- Deduction in 2007: $4,000.
- Deduction in 2008: $5,500.
- Deduction in 2009: $7,000.
Total depreciation deductions: $4,000 + $5,500 + $7,000 = $16,500.
Adjusted cost of the old equipment: $25,000 - $16,500 = $8,500.
3. Add the cash boot paid in the trade: $10,000.
Total adjusted basis before fair market value adjustment: $8,500 + $10,000 = $18,500.
4. Adjust the basis by the fair market value of the equipment received:
Fair market value of the equipment received: $20,000.
Adjusted basis after fair market value adjustment: $18,500 + $20,000 = $38,500.
Therefore, the basis of the equipment acquired in the trade is $38,500.