Tom and Frank are brothers. Each owns investment property in the other’s hometown. To make their lives easier, they decide to legally exchange the investment properties. Under the terms of the exchange, Frank will transfer realty (adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty (adjusted basis of $60,000; fair market value of $92,000). Tom’s property is subject to a mortgage of $12,000 that will be assumed by Frank.
a. What are Frank’s and Tom’s recognized gains?
b. What are their adjusted bases?
c. As an alternative, Frank has proposed that rather than assuming the mortgage, he will transfer cash of $12,000 to Tom. Tom would use the cash to pay off the mortgage. Advise Tom on whether this alternative would be beneficial to him from a tax perspective.