Fred and Sarajane exchanged land in a qualifying like-kind exchange. Fred gives up land with an adjusted basis of $11,000 (fair market value of $16,000) in exchange for Sarajane's land with a fair market value of $12,000 plus $4,000 cash. How much gain should Fred recognize on the exchange?

a. $5,000

b. $1,000

c. $0

d. $4,000

e. None of these choices are correct

The answer is 5,000. the option (a) is correct

Explanation:

Solution

Given that:

The adjusted basis of land = $11,000

The fair market value = $16,000

Now,

We have to find how much gain should Fred recognize on the exchange

Thus

The fair market value of land = $12,000 + $4,000 = $16,000

Recognized exchange by Fred = fair market value of land - Give up value

= $16,000 - $11,000

=$5,000

Therefore, the gain Fred should recognize or notice on the exchange is $5,000