[Anonymous]

The information is:

Jones contributes property to form a corporation.

Propery Basis = $100,000

Liability associated with property = $60,000 (which corp assumes)

Property FMV = $120,000

The solution says realized gain by Jones = FMV – basis = $20,000. But, I thought amount realized included FMV and Cancellation of Debt (which in this case would be the liability assumed by the corp). What am I missing here?

So my solution would be: Amount Realized $120,000 + 60,000 – Basis $100,000 = $80,000. What’s wrong with this?

[kyalsinlamin]

You are thinking more than you should and its making you go circular. The realized gain is simply the difference between fmv of property and its adjusted basis. Assumption of liabilities by corp would be included in figuring out the adjusted basis of the property after transfer.

[kyalsinlamin]

You are thinking more than you should and its making you go circular. The realized gain is simply the difference between fmv of property and its adjusted basis. Assumption of liabilities by corp would be included in figuring out the adjusted basis of the property after transfer.

[kyalsinlamin]

You are thinking more than you should and its making you go circular. The realized gain is simply the difference between fmv of property and its adjusted basis. Assumption of liabilities by corp would be included in figuring out the adjusted basis of the property after transfer.

[kyalsinlamin]

Sorry for duplicate entries. Tried to use the ph and first two attempts showed failed by server and apparently nothing was wrong

[Anonymous]

Now I'm confused..

Would the realized gain be $40,000 in a like-kind exchange since cancellation of debt is consider a boot received? Is there a difference in the treatment of cancellation of debt in a like-kind exchange compared to a outright sale of an asset?

Thanks

[Zaq]

Normally, these kind of problems are separated based on a shareholder/individual basis and the corporation's basis.

Gain realized = Amount realized (FMV) – Adjusted basis (NBV).

Gain recognized = Boot received or if Liabilities exceed Adjusted Basis. In this case it's $0.

Jones new basis = Old NBV – Liabilities assumed by corp + Recognized Gain. In this case, it's $40,000 ($100,000 – $60,000).

DON'T confuse this with Like-Kind exchanges:

Gain Realized = FMV of Asset Rec'd – NBV of Asset Given up

Gain Recognized = LESSER of Gain Realized or Boot Rec'd (including debt assumed by others)

New basis = NBV of Asset Given Up + Boot Paid + Recognized Gain – Boot Received.

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[MustPass1988]

Doesn't it depend on how much control of the corporation Jones received? If he received over 80% control then he would not recognize a gain, as it would be a nontaxable event to the shareholder and the corporation would assume the shareholder's basis. If the shareholder received LESS than 80% control than he would recognize a gain as FMV-basis. …Right?

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[Author]

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