Treasury Regulations, Subchapter A, Sec. 1.1031(d)-2
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Sec. 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 150,000........................
subject to
which old
property was
transferred
----------------------------------
Total 800,000........................
considerat
ion
received..
Less: Adjusted 500,000........................
basis of
property
transferred
----------------------------------
Gain 300,000........................
realized..
==================================
Under section 500,000........................
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
Less: Amount of
money
received:
Cash......... $50,000........................
Amount of 150,000........................
liabilities
subject to
which
property was
transferred.
___............................ 200,000
--------------
Difference. ............................... 300,000
Plus: Amount of gain recognized upon the 200,000
exchange
----------------------------------
Basis of 500,000........................
property
acquired
upon the
exchange..
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.<p> (b) D realizes a gain of $120,000 on the exchange, computed as follows:</p>
<p>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:</p>
(c) E realizes a gain of $75,000 on the exchange, computed as follows:
<p>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:</p>
Value of ................................. $250,000
property
received
Cash 40,000
Liabilities 80,000...........................
subject to
which old
property was
transferred
------------------------------------
Total 370,000..........................
considerat
ion
received..
Less:
Adjusted $100,000.........................
basis of
property
transferred.
Liabilities 150,000..........................
to which new
property is
subject.....
____............................. 250,000
-------------
Gain ................................. 120,000
realized..
Adjusted basis of property transferred $100,000
Liabilities to 150,000..............................................
which new
property is
subject
--------------------------------------------------------
Total...... 250,000..............................................
Less: Amount of $40,000..............................................
money
received: Cash
Amount of 80,000...............................................
liabilities
subject to
which property
was
transferred
____................................................. 120,000
-----------------------
Difference........................................................ 130,000
Plus: Amount of 40,000...............................................
gain
recognized
upon the
exchange
--------------------------------------------------------
Basis of 170,000..............................................
property
acquired
upon the
exchange..
Value of property received $220,000
Liabilities 150,000..............................................
subject to
which old
property was
transferred
--------------------------------------------------------
Total 370,000..............................................
considerat
ion
received..
Less:
Adjusted $175,000.............................................
basis of
property
transferred.
Cash......... 40,000...............................................
Liabilities 80,000...............................................
to which new
property is
subject.....
____................................................. 295,000
-----------------------
Gain realized..................................................... 75,000
Adjusted basis of property transferred $175,000
Cash 40,000...............................................
Liabilities to 80,000...............................................
which new
property is
subject
--------------------------------------------------------
Total...... 295,000..............................................
Less: Amount of $150,000.............................................
money
received:
Amount of
liabilities
subject to
which property
was
transferred
____................................................. 150,000
-----------------------
Difference........................................................ 145,000
Plus: Amount of 30,000...............................................
gain
recognized
upon the
exchange
--------------------------------------------------------
Basis of 175,000..............................................
property
acquired
upon the
exchange..
