Question

Ester transfers land (basis of $200,000 and fair market value of $355,000) to a controlled corporation in return for stock in the corporation. However, shortly before the transfer, Ester mortgages the land and uses the $25,000 proceeds to meet personal obligations. Along with the land, the mortgage is transferred to the corporation.

Required:Based on these transactions, calculate the following for Ester:a) realized gain on the transfer.b) recognized gain.

Answer 1

a. $180,000

b. $25,000

Step-by-step explanation:

a. Realized gain on the transfer = Fair market value + Mortgage value − Actual basis

= $355,000 + $25,000 - $200,000

= $180,000

Therefore, the realized gain of Ester is $180,000

b. The amount used for personal obligation can be recognized as gain during transfer. It is observed that Ester mortgages the land and get $25,000 as proceed which is used to meet personal obligation

Recognized gain = $25,000