How to Calculate Lonnie's Basis in the Warehouse Received?

What is Lonnie's basis in the warehouse received after exchanging the land and cash for Terry's warehouse?

Lonnie's basis in the warehouse received will be $175,000.

Explanation:

Lonnie owns land held for investment with a Fair Market Value (FMV) of $130,000 and a basis of $110,000. Lonnie decides to exchange the land, plus $15,000 in cash, for a warehouse owned by Terry. The warehouse is worth $190,000 but is subject to a mortgage of $35,000 which Lonnie will assume. Terry's basis in the warehouse is $105,000.

Calculation of Lonnie's Basis in the Warehouse Received

To determine Lonnie's basis in the warehouse received, we need to subtract the cash exchanged from the worth of the warehouse:

Lonnie's basis in the warehouse received = Worth of warehouse - Cash

Lonnie's basis in the warehouse received = $190,000 - $15,000

Lonnie's basis in the warehouse received = $175,000

Therefore, Lonnie's basis in the warehouse received after the exchange is $175,000. This calculation is done by subtracting the cash portion from the value of the warehouse.