Evelyn’s Excavating Service trades an excavator for a new backhoe. The excavator has a fair market value of $37,000 and an adjusted basis of $24,000. The backhoe is worth $34,000. The owner of the backhoe, Susan, agrees to assume Evelyn’s $8,000 loan on the excavator, and Evelyn’s pays $5,000 in cash in the exchange. Susan’s adjusted basis in the backhoe is $18,000.

a. What are Evelyn’s Excavating Service’s realized and recognized gains or losses on the exchange and its basis in the backhoe?

b. How much of the realized gain must Susan recognize on the exchange? What is her basis in the excavator?