 and welcome to the session in which we would look at a 1031 exercise or CPA simulation or some sort of a practice to understand how section 1031 works, non-taxable exchanges. Now bear in mind this is an example. If you want to see the recording, the explanation for section 1031, please see the prior recording. So this is beneficial after you have went over the explanation. So in the current year Olivia exchanged various real properties in exchange transaction that qualify for like-kind exchange treatment. So we're already told it's a like-kind exchange under section 1031. The following table summarizes those exchanges. Consider each exchange separately and determine the amount of gain realized, gain recognized, and the basis for the like-kind property received. For a section 1031 exchanges, which is non-taxable exchanges, they could ask you about three things. What is the gain realized from the transaction? What is the gain recognized and what's the basis? So read the question carefully. Don't jump into assuming what they're asking. You read it carefully. Are they asking me for recognized, realized, or the basis? In this situation, this is a quasi-simulation CPA exam simulation that could cover all three. It's covering all three. Looking at the first exchange. First, you compute the gain realized. Well, basis of the of the like-kind property given up, the basis is 300,000, fair market value, fair market value of the property given up half a million. Well, if we take half a million minus 300,000, we have a gain of 200,000 that's realized. Now, we need to find out if any of that gain that's realized is recognized. Recognized means it's taxable. Well, if we look here, we say that the fair market value of the cash received is zero. We received no boot. We received no cash. Therefore, the gain recognized is zero. So what are we going to do with this 200,000? We are going to defer the 200,000. Therefore, to find the basis, we are going to find out what fair market value of the asset given to us. Since it's a gain, we deduct the deferred gain. Therefore, the basis is 300,000. Again, we deduct the deferred gain to reduce our basis. Therefore, in the future, we have more gains or less losses for that matter. Let's look at before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. Exchange two. Exchange to the basis of the like-kind property given up 300,000, fair market value is half a million. Good. Basically, the same numbers we have a realized gain of 200,000. Let's take a look at cash received. Cash received is zero. Cash paid is 100,000. It doesn't really matter. Cash paid does not trigger a recognition. Therefore, gain is zero. The gain recognized is zero because cash was paid not received. So, we did not receive any boot. Therefore, basis of the property received will be 600,000 minus the deferred gain 600,000 if it is the fair market value of the asset received minus the deferred gain. Let's look at situation three. We have basis of 300,000 for the property given up. Fair market value is 200,000. Well, if we sell this asset today, we're going to have a loss, a loss of 100,000. Well, what do we do with losses? Well, guess what? IRS, the government don't like you to record the losses. Therefore, it's easy. For the losses, you're going to always defer them. Okay? Therefore, no loss is recognized. You're going to defer them. Now, how do we treat the losses? We're going to take the fair market value of the asset received 600,000 and we are going to add the loss. Adding the loss would increase our basis in the property, in the new property to 700,000. Well, what's going to happen? Now, our basis is higher. Therefore, when we sell it, our gain is lower into the future. Right? Our gain is lower. And this is what we meant by deferring the loss. Deferring the loss makes our gain lower. So, if we sold it for 800,000, well, we compare the 800 to the 700, not to the 600. Therefore, we would only have a gain of 100,000. Same concept. If we sold it for 500,000, if we sold it for 500,000, we compare the 500,000 to the 700,000 and we'll have a loss of 200,000 versus comparing the 500,000 to the 600,000. Therefore, it increased our loss. We would recapture the loss. Either when we sell it at a gain, we have less gain. Or when we sell it at a loss, we recapture the loss because our basis is higher. Transaction four or exchange four. The basis of the like-kind property given up is 300,000. Fair market value of the asset given up is 800,000. If we sell it, we're going to have half a million of gains. 800,000 minus 300, we have half a million. Now, fair market value of cash received, they gave us 200,000 cash. So, we did receive a boot. Well, what do we have to do now? We have to choose between the lower, the amount recognized is the lower of the boot received or the gain. The gain is 500,000. The boot received is 200,000. Well, the boot is lower, 200,000. Now, we had a gain of half a million of which 200,000 of it is taxable now. Taxable now. And the remainder, the remainder is 300,000 is the third or non-taxable for now. The third, you want to call it the third, the third, which is a good idea to kind of call it the third and non-taxable for now. So, what do we do with this non-taxable for now? It's a gain. What's going to happen is we're going to take the fair value of the property that we receive to find the basis and deduct the third gain. Therefore, our basis in the new property is 300,000, 600,000 of the fair value of the like-kind exchange minus the third gain. Let's look at exchange five. Basis is 300,000. The fair market value 270. If we sold this asset, we're going to have a loss of 30,000. Again, what do we do with losses? When we have losses, we always defer the losses. Therefore, it's equal to zero. Well, what's the basis of the new property? It's the fair value of the asset received plus the deferred loss, which is plus 30,000, which will give us 280,000. What should you do now? Go to Farhat Lectures whether you are a CPA, EA candidate or accounting student and look at additional multiple choice. Now, this scenario ignores or does not involve liability. In the next session, I will explain the liability and work a few examples. Very important to understand section 1031 exchanges, which is non-taxable exchanges where you defer your gains and you defer your losses for tax purposes. Important topic. Good luck.