SECTION 1.1031(d)-2. TREATMENT OF ASSUMPTION OF LIABILITIES.
For the purposes of section 1031(d), the amount of any liabilities of the
taxpayer assumed by the other party to the exchange (or of any liabilities
to which the property exchanged by the taxpayer is subject) is to be
treated as money received by the taxpayer upon the exchange, whether or
not the assumption resulted in a recognition of gain or loss to the
taxpayer under the law applicable to the year in which the exchange was
made. The application of this section may be illustrated by the following
examples:
EXAMPLE 1. B, an individual, owns an apartment house which has an
adjusted basis in his hands of $500,000, but which is subject to a
mortgage of $150,000. On September 1, 1954, he transfers the
apartment house to C, receiving in exchange therefor $50,000 in cash
and another apartment house with a fair market value on that date of
$600,000. The transfer to C is made subject to the $150,000 mortgage.
B realizes a gain of $300,000 on the exchange, computed as follows:
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Value of property received $600,000
Cash 50,000
Liabilities subject to which old property
was transferred 150,000
-----------
Total consideration received 800,000
Less: Adjusted basis of property transferred 500,000
-----------
Gain realized 300,000
===========
Under section 1031(b), $200,000 of the
$300,000 gain is recognized. The basis of
the apartment house acquired by B upon
the exchange is $500,000, computed as
follows: Adjusted basis of property
transferred 500,000
Less: Amount of money received:
Cash $50,000
Amount of liabilities subject to which
property was transferred 150,000
-----------
200,000
-----------
Difference 300,000
Plus: Amount of gain recognized upon the exchange 200,000
-----------
Basis of property acquired upon the
exchange 500,000
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EXAMPLE 2.
(a) D, an individual, owns an apartment house. On December 1,
1955, the apartment house owned by D has an adjusted basis in
his hands of $100,000, a fair market value of $220,000, but is
subject to a mortgage of $80,000. E, an individual, also owns an
apartment house. On December 1, 1955, the apartment house owned
by E has an adjusted basis of $175,000, a fair market value of
$250,000, but is subject to a mortgage of $150,000. On December
1, 1955, D transfers his apartment house to E, receiving in
exchange therefore $40,000 in cash and the apartment house owned
by E. Each apartment house is transferred subject to the
mortgage on it.
(b) D realizes a gain of $120,000 on the exchange, computed as
follows:
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Value of property received $250,000
Cash 40,000
Liabilities subject to which old property
was transferred 80,000
-----------
Total consideration received 370,000
Less:
Adjusted basis of property transferred $100,000
Liabilities to which new property is
subject 150,000
250,000
-----------
Gain realized 120,000
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For purposes of section 1031(b), the amount of OTHER PROPERTY OR MONEY
received by D is $40,000. (Consideration received by D in the form of a
transfer subject to a liability of $80,000 is offset by consideration
given in the form of a receipt of property subject to a $150,000
liability. Thus, only the consideration received in the form of cash,
$40,000, is treated as OTHER PROPERTY OR MONEY for purposes of section
1031(b).) Accordingly, under section 1031(b), $40,000 of the $120,000 gain
is recognized. The basis of the apartment house acquired by D is $170,000,
computed as follows:
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Adjusted basis of property transferred $100,000
Liabilities to which new property is
subject 150,000
-----------
Total 250,000
Less: Amount of money received: Cash $40,000
Amount of liabilities subject to which
property was transferred 80,000
120,000
-----------
Difference 130,000
Plus: Amount of gain recognized upon the
exchange 40,000
-----------
Basis of property acquired upon the
exchange 170,000
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(c) E realizes a gain of $75,000 on the exchange, computed as
follows:
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Value of property received $220,000
Liabilities subject to which old property
was transferred 150,000
-----------
Total consideration received 370,000
Less:
Adjusted basis of property transferred $175,000
Cash 40,000
Liabilities to which new property is
subject 80,000
295,000
-----------
Gain realized 75,000
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For purposes of section 1031(b), the amount of OTHER PROPERTY OR MONEY
received by E is $30,000. (Consideration received by E in the form of a
transfer subject to a liability of $150,000 is offset by consideration
given in the form of a receipt of property subject to an $80,000 liability
and by the $40,000 cash paid by E. Although consideration received in the
form of cash or other property is not offset by consideration given in the
form of an assumption of liabilities or a receipt of property subject to a
liability, consideration given in the form of cash or other property is
offset against consideration received in the form of an assumption of
liabilities or a transfer of property subject to a liability.)
Accordingly, under section 1031(b), $30,000 of the $75,000 gain is
recognized. The basis of the apartment house acquired by E is $175,000,
computed as follows:
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Adjusted basis of property transferred $175,000
Cash 40,000
Liabilities to which new property is
subject 80,000
-----------
Total 295,000
Less: Amount of money received: Amount of
liabilities subject to which property was
transferred $150,000
150,000
-----------
Difference 145,000
Plus: Amount of gain recognized upon the
exchange 30,000
-----------
Basis of property acquired upon the
exchange 175,000
