Section 1001(b) measures gain by the “amount realized,” which includes the money received plus the fair market value of any other property. Treas. Reg. § 1.1001-2 makes clear that the amount realized also includes the amount of any liabilities from which the seller is discharged — whether the debt is paid off by the buyer or simply assumed as part of the purchase.
In 1976 A purchases an asset for $10,000, paying $1,000 in cash and signing a $9,000 note payable to the seller. A is personally liable on the note (the seller has full recourse) and the asset is pledged as security. During 1976 and 1977 A claims $3,100 of depreciation and pays the note principal down to $7,600, giving A an adjusted basis of $6,900 ($10,000 cost − $3,100 depreciation).
At the beginning of 1978 A sells the asset. The buyer pays A $1,600 in cash and assumes personal liability for the $7,600 balance still owed; A remains only secondarily liable on the debt. Under § 1.1001-2(a), A’s amount realized is $9,200 — the $1,600 cash plus the $7,600 liability assumed by the buyer.
Subtracting A’s $6,900 adjusted basis from the $9,200 amount realized yields $2,300 of gain. The example illustrates that debt relief is treated as sales proceeds even when the seller stays secondarily liable, so the assumed liability must be added to the cash received when computing gain.
Under Treas. Reg. § 1.1001-2(a), the liability a buyer assumes counts as part of the seller’s amount realized, so A’s proceeds are $9,200 ($1,600 cash + $7,600 debt) rather than just the cash.
A’s adjusted basis is $6,900 — the $10,000 original cost reduced by the $3,100 of depreciation deducted in 1976 and 1977.
The $9,200 amount realized less the $6,900 adjusted basis produces $2,300 of recognized gain on the sale.
Even though A remains secondarily liable on the note after the buyer assumes it, the full $7,600 is still included in A’s amount realized.
