When you exchange property for stock in a corporation, there can be various tax consequences that arise. Here are a few important things to consider:
- At least 80% of the corporation's voting and non-voting stock must be jointly owned by you and other transferors immediately following the transfer. In general, there won't be any gain or loss on the exchange. Failure to meet this control requirement may result in recognition of gain or loss. Your basis in the transferred property will be compared to the value of the stock received to determine the basis.
- The basis of the property that you transfer to the corporation stays with the corporation and becomes the basis for the stock you receive. In case the property's fair market value is lower than its basis, the corporation's basis in the property is decreased to its fair market value.
- In case you get cash or other property (called 'boot') in addition to the corporation's stock, you may need to recognize gain. The value of the boot received or the property's gain are the two factors that determine the recognized gain.
- If depreciation recapture is involved in the transfer, it could result in ordinary income or special capital gain tax rates.
- A gain may be recognized by the corporation at corporate level if the fair market value of the property exceeds its adjusted basis. The corporation is unable to acknowledge any losses when distributing appreciated property.
- When transferring property to a corporation in exchange for stock, there are several tax consequences to keep in mind.
Here is an example to explain how the stock exchange of stocks for a company affects the formation of a corporation.
A property with an adjusted basis of $20,000 and a fair market value of $31,000 was sold to a new corporation for 100% of its stock. He receives 100 shares of stock that are valued at $16,000 and 10,000 in cash. The corporation is responsible for the $5,000 mortgage on the property. What is the outcome of the transaction that has been realized and recognized?
To determine the tax impact on taxpayers, I'll arrange the data first.
To receive 100 shares of stock or some ownership in a company, what did the taxpayer give up?
A property that has been adjusted to $20,000 and a fair market value of $31,000, and relief of morgage debt which is worth of $5,000.
In exchange for $20,000 worth of shares that had an FMV of $30,000, what did the taxpayer receive in order to acquire equity in the corporation?
He received $10,000 in cash + $16,000 in shares and $5,000 worth of relief of debt = $31,000.
He surrendered $20,000 woth of property.
How can I calculate the realized and recognized gain or loss based on the above date?
As a result, the taxpayer had earned/realized $11,000 ($31,000 - $20,000), but the recognized gain of $10,000 was exclusively for cash, which is also known as a boot.
