How to Calculate Substituted Basis in a Real Estate Property Exchange

Question:

Joe Jackson, a real estate developer, wants to exchange his land for an apartment building owned by Sam Tower. What will be Joe's substituted basis in the apartment building?

Final answer:

Joe's substituted basis in the apartment building would be $1,500,000, which consists of his basis in his previous property ($900,000) and the $600,000 mortgage he is assuming.

When determining Joe's substituted basis in the apartment building, we need to consider his basis in the land he is exchanging for the building as well as any additional amounts involved in the exchange.

Joe's basis in his land is $900,000. By assuming Sam Tower's $600,000 mortgage on the apartment building, Joe's substituted basis in the apartment building becomes $1,500,000.

This calculation involves adding Joe's original basis in his previous property to the amount of the mortgage he is taking over in the exchange.

It is important to understand the concept of substituted basis when engaging in real estate property exchanges to ensure accurate valuation and tax implications.