Can someone please explain to me this question?
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
a. $0
b.$8,000
c.$12,000
d.$6,000
The answer is d.
Choice “d” is correct. Generally, this is a nontaxable transaction. However, the liabilities assumed by the corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount of the excess, which is $6,000 ($12,000 − $6,000) is a gain that must be recognized. Note that the fact that this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are the same as for a C Corporation.
I understand what they say here, but my initial thoughts on this question is: Gain realized = FMV-Basis=20,000-6,000=14,000
But gain is only realized till the point of boot received, in this case, that would be the $12,000 liability.
So the total gain shareholder must recognize would be $12,000.
Please tell me where I was wrong
.