Video instructions and help with filling out and completing Who Form 4797 Exchanges

Instructions and Help about Who Form 4797 Exchanges

Okay we are doing example problem from chapter 9 under application problems number 2 on page 253 it reads business K exchange old machinery with a fair market value of 95 thousand for new machinery which also had a fair market value of 95 thousand business case tax basis in the old machinery was 107 thousand dollars so under Part A compute business case realized laws recognize loss and tax basis in a new machinery assuming the exchange was a taxable transaction so in this case since it's taxable transaction we have amount realized of 95,000 our basis was 107 thousand which means my loss that we are going to realize is twelve thousand dollars because it is a taxable transaction my recognized loss is also going to be twelve thousand my tax basis then since we've already recognized a loss will now be the fair market value of the equipment so it'll be ninety five thousand is my new my new tax basis for the equipment under Part B compute then realize loss recognize loss and tax basis in the new machinery assuming the exchange was a non-taxable transaction so if that's the case our non tax on minor amount to be realized 95 thousand - our cost basis of 107 thousand so my loss is still going to be twelve thousand but because it's a non taxable transaction the amount I'm recognizing is going to be zero okay so we're going to defer that loss my new basis in the equipment since we're deferring that loss is going to be equal to our $95,000 realized amount from sale plus my twelve thousand deferred loss 107,000 which of course is the original tax basis okay but that's how we calculated that substitute substituted new tax basis so as you can see our basis and now we've handled it or differed between whether it's a taxable transaction versus a non taxable transaction the final component then is we have six months after the exchange business case sold the new machinery for a hundred thousand dollars cash how much gain are lost his business Kay recognized if the exchange was taxable and then second part of that is how much of was the was recognized if the exchange is non-taxable okay so now we've made that sale for a hundred thousand dollars cash so I'm out realize from the sale is a hundred thousand dollars so under a taxable basis our basis original basis in the equipment was ninety five thousand remember as we just a bad basis so therefore my gain is going to be equal a hundred thousand minus my tax basis in ninety five thousand so I'm gonna have a realized gain and recognize gain of five thousand dollars if our original sale was non-taxable what do we do well we're gonna start with our hundred thousand dollars amount realized our tax basis and the non taxable exchange was $107,000 we did not recognize that prior loss so therefore we end up with a loss of seven thousand dollars on that sale okay so again whether the original transaction was taxable or non-taxable does affect subsequent transactions because the weight does adjust our tax basis if we defer those losses that's going to change our tax basis in the in the new property and therefore also change our the amount of loss that we're going to recognize upon a sale.

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