1.1031(d)-2 Treatment of assumption of liabilities.
§ 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:
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
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:
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
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:
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
(c) E realizes a gain of $75,000 on the exchange, computed as
follows:
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
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:
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