Your client, R. E. Dealer, is considering exchanging commercial property with Fabric Industries, Inc. Dealer owns a warehouse which it has held for investment since 2015 with a fair market value of $575,000, subject to a mortgage of $400,000 and an adjusted basis of $175,000. Fabric Industries’ owns a rental property with a fair market value of $540,000, subject to a mortgage of $365,000.

The planned transaction is for Dealer to exchange his property for Fabric’s property plus $70,000 cash. Each party will assume the mortgage on the property received.

Dealer wants to make sure that the transaction qualifies for IRC Section 1031 like-kind exchange and has asked you to provide a memo detailing the requirements that must be satisfied for like-kind exchange treatment. Your memo should also analyze any gain realized and/or recognized, the taxation, if any, and Dealer’s basis in the new property.