B, an individual, owns an apartment house (Apt. House D) with an adjusted basis of $500 that is subject to a $150 mortgage, so its net fair market value is $650. On September 1, 1954, B transfers that apartment house to C and receives in exchange another apartment house (Apt. House E) with a fair market value of $600 plus $50 in cash. The transfer to C is made subject to the $150 mortgage, so C assumes that debt.
B’s amount realized is $800 — the $600 value of Apt. House E received, the $50 of cash, and the $150 mortgage relief. Subtracting B’s $500 basis in Apt. House D produces a realized gain of $300.
Under section 1031(b), the gain is recognized only to the extent of the boot B receives. Here the boot is $200 — the $50 of cash plus the $150 of net liability relief, which section 1031(d) and Treas. Reg. § 1.1031(d)-2 treat as money received. B therefore recognizes $200 of gain, and the remaining $100 of realized gain is deferred through B’s substituted basis in Apt. House E.
The $150 mortgage that C assumes is treated as money received by B under Treas. Reg. § 1.1031(d)-2, so it counts as boot alongside the $50 of cash.
B’s $300 realized gain is recognized only to the extent of the $200 of total boot ($50 cash + $150 debt relief), not the full realized amount.
The $100 of unrecognized gain is preserved in B’s carryover basis in Apt. House E and is taxed on a later disposition, not eliminated.
B’s $800 amount realized combines the $600 replacement property, $50 cash, and $150 mortgage relief, illustrating that assumed liabilities are part of the consideration.
