#### § 1.1031(d)-2 Treatment of assumption of liabilities.

For the purposes of section 1031(d), the amount of any liabilities of the taxpayer assumed by the other party to the exchange (or of any liabilities to which the property exchanged by the taxpayer is subject) is to be treated as money received by the taxpayer upon the exchange, whether or not the assumption resulted in a recognition of gain or loss to the taxpayer under the law applicable to the year in which the exchange was made. The application of this section may be illustrated by the following examples:

# Example 1.

B, an individual, owns an apartment house which has an adjusted basis in his hands of $500,000, but which is subject to a mortgage of $150,000. On September 1, 1954, he transfers the apartment house to C, receiving in exchange therefor $50,000 in cash and another apartment house with a fair market value on that date of $600,000. The transfer to C is made subject to the $150,000 mortgage. B realizes a gain of $300,000 on the exchange, computed as follows:

| Value of property received | $600,000 |
| --- | --- |
| Cash | 50,000 |
| Liabilities subject to which old property was transferred | 150,000 |
| Total consideration received | 800,000 |
| Less: Adjusted basis of property transferred | 500,000 |
| Gain realized | 300,000 |
| Under section 1031(b), $200,000 of the $300,000 gain is recognized. The basis of the apartment house acquired by B upon the exchange is $500,000, computed as follows: Adjusted basis of property transferred | 500,000 |
| Less: Amount of money received: | | |
| Cash | $50,000 | |
| Amount of liabilities subject to which property was transferred | 150,000 | |
| | ___ | 200,000 |
| Difference | | 300,000 |
| Plus: Amount of gain recognized upon the exchange | 200,000 |
| Basis of property acquired upon the exchange | 500,000 |

# Example 2.

(a) D, an individual, owns an apartment house. On December 1, 1955, the apartment house owned by D has an adjusted basis in his hands of $100,000, a fair market value of $220,000, but is subject to a mortgage of $80,000. E, an individual, also owns an apartment house. On December 1, 1955, the apartment house owned by E has an adjusted basis of $175,000, a fair market value of $250,000, but is subject to a mortgage of $150,000. On December 1, 1955, D transfers his apartment house to E, receiving in exchange therefore $40,000 in cash and the apartment house owned by E. Each apartment house is transferred subject to the mortgage on it.

(b) D realizes a gain of $120,000 on the exchange, computed as follows:

| Value of property received | | $250,000 |
| --- | --- | --- |
| Cash | 40,000 |
| Liabilities subject to which old property was transferred | 80,000 |
| Total consideration received | 370,000 |
| Less: | | |
| Adjusted basis of property transferred | $100,000 | |
| Liabilities to which new property is subject | 150,000 | |
| | ____ | 250,000 |
| Gain realized | | 120,000 |

For purposes of section 1031(b), the amount of *other property or money* received by D is $40,000. (Consideration received by D in the form of a transfer subject to a liability of $80,000 is offset by consideration given in the form of a receipt of property subject to a $150,000 liability. Thus, only the consideration received in the form of cash, $40,000, is treated as *other property or money* for purposes of section 1031(b).) Accordingly, under section 1031(b), $40,000 of the $120,000 gain is recognized. The basis of the apartment house acquired by D is $170,000, computed as follows:

| Adjusted basis of property transferred | $100,000 |
| --- | --- |
| Liabilities to which new property is subject | 150,000 |
| Total | 250,000 |
| Less: Amount of money received: Cash | $40,000 | |
| Amount of liabilities subject to which property was transferred | 80,000 | |
| | ____ | 120,000 |
| Difference | 130,000 |
| Plus: Amount of gain recognized upon the exchange | 40,000 |
| Basis of property acquired upon the exchange | 170,000 |

(c) E realizes a gain of $75,000 on the exchange, computed as follows:

| Value of property received | $220,000 |
| --- | --- |
| Liabilities subject to which old property was transferred | 150,000 |
| Total consideration received | 370,000 |
| Less: | |
| Adjusted basis of property transferred | $175,000 | |
| Cash | 40,000 | |
| Liabilities to which new property is subject | 80,000 | |
| | ____ | 295,000 |
| Gain realized | 75,000 |

For purposes of section 1031(b), the amount of *other property or money* received by E is $30,000. (Consideration received by E in the form of a transfer subject to a liability of $150,000 is offset by consideration given in the form of a receipt of property subject to an $80,000 liability and by the $40,000 cash paid by E. Although consideration received in the form of cash or other property is not offset by consideration given in the form of an assumption of liabilities or a receipt of property subject to a liability, consideration given in the form of cash or other property is offset against consideration received in the form of an assumption of liabilities or a transfer of property subject to a liability.) Accordingly, under section 1031(b), $30,000 of the $75,000 gain is recognized. The basis of the apartment house acquired by E is $175,000, computed as follows:

| Adjusted basis of property transferred | $175,000 |
| --- | --- |
| Cash | 40,000 |
| Liabilities to which new property is subject | 80,000 |
| Total | 295,000 |
| Less: Amount of money received: Amount of liabilities subject to which property was transferred | $150,000 | |
| | ____ | 150,000 |
| Difference | 145,000 |
| Plus: Amount of gain recognized upon the exchange | 30,000 |
| Basis of property acquired upon the exchange | 175,000 |