Question

Martin transfers real estate with an adjusted basis of $260,000 and fair market value of $350,000 to a newly formed corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $300,000.

If amount is zero, enter "0".

Martin has a recognized gain on the transfer of $ and a basis of $ for his stock.

Answer 1

Martin has a recognized gain on the transfer of $40,000 and a basis of $0 for his stock.

Step-by-step explanation:

Martin's gain = liability assumed on the real estate transfer - real estate basis = $300,000 - $260,000 = $40,000

Martin's basis for his stock = real estate basis + recognized gain - liability assumed on the real estate transfer = $260,000 + $40,000 - $300,000 = $0

In this case the corporation assumed a liability, and the basic accounting equation is:

assets = liabilities + equity

If the liability's value offset the asset value, then there is no increase in equity.