Question

Diego 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. Determine Diego's recognized gain on the transfer and the basis for his stock.

Answer 1

The correct answer for gain on transfer is $40,000 and the basis of his stock is $0.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Liability on the transferred real estate = $300,000

Amount transferred on adjusted basis = $260,000

So, we can calculate the gain on the transfer by using following formula:

Gain on transfer = Liability on the transferred real estate - Amount transferred on adjusted basis

= $300,000 - $260,000

= $40,000

Hence, the gain on the transfer is $40,000 and $0 on the basis of stock because 100% stock exchanged.