Question

f a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized if: The property is sold on credit. A mortgage on the property is assumed by the buyer. A mortgage on the property is assumed by the seller. The buyer acquires the property subject to a mortgage of the seller. Stock that has a basis to the purchaser of $6,000 and a fair market value of $10,000 is received by the seller as part of the consideration.

Answer 1

a. The property is sold on credit.

The amount realized is the cash received at the date of sale and the cash that will be received in future when the credit is settled.

b. A mortgage on the property is assumed by the buyer.

The amount realized increases because the seller will see their debt reduced and still receive cash from the buyer for the purchase of the property.

c. A mortgage on the property is assumed by the seller.

The amount realized decreases because the realized amount will have to be net of the mortgage that the seller now has to pay.

d. The buyer acquires the property subject to a mortgage of the seller.

Amount realized increases as the buyer will become the one making mortgage payments instead of the seller which effectively means that the seller gets the realized value net of debt.

e. Stock that has a basis to the purchaser of $6,000 and a fair market value of $10,000 is received by the seller as part of the consideration.

Realized value increases to $10,000 because that is the fair value of the stock when exchange for the property.