Question

A transfers land to Newco in exchange for 100% of Newco’s stock. The land has a basis of $50, FMV of $100 and is subject to a mortgage of $40.

A) What are the consequences to each of the parties?

B) Suppose in that the mortgage was placed on the property immediately before the transfer to Newco. A wanted cash in order to buy a yacht to be used for personal purposes, so he took out a mortgage on the land. Would this change your answer

C) Suppose instead that the mortgage was for $60. Suppose further that this mortgage was incurred on the purchase of the property many years ago. Would this change your answer?

D) Same as (c) except that A also transfers accounts payable of $10. A is a cash basis taxpayer. How would this change your answer?

Answer 1

2 (a) In the first case A transfers the land in exchange of stocks with Newco's. And newco's get the ownership of land in favor of shares. The land has a value of $50, FMV of $100 and is subjected to a mortgage of $40.

2 (b) No,This would not change because before exercising the sales A has taken the property out of mortgage to Newco's.

2 (c) Indeed, if the land is still under home loan when he practices his entitlement to sell the land and furthermore when the worth is over half of FMV.

2 (d) No change will occur.