The Honeycutts have come to your advice, believing either transaction to be a like-kind exchange that will allow them to defer any gain. Assume that Tom and Alice expect their marginal tax rate to remain the same for 2015.

Write a letter to Tom and Alice that contains your advice on the proposed transactions. Also prepare a memo for the tax files.

Tom and Alice Honeycutt have 30 acres of prime farmland that they inherited from Tom's father several years ago. At that time, the fair market value of the land was $150,000 (which became their basis in the land). The Honeycutts have been holding the land as an investment. The property was recently appraised for $190,000, and there is an outstanding mortgage on the land of $28,000. They are considering trading this land for property in the mountains of southern Colorado. Ultimately, they would like to build a vacation home on the Colorado property. The Colorado property owner who has significant land holdings in the area has provided two options to Tom and Alice (in both cases, the Colorado property owner would assume the mortgage as part of the exchange):

1. 15 acres of property with a fair market value of $135,000 plus $27,000 of cash; or

2. 10 acres of property with a fair market value of $160,000 plus $2,000 of cash.