5.14 Amount Realized Is the Total Selling Price

Amount realized is the tax term for the total selling price. It includes cash, the fair market value of additional property received, and any of your liabilities that the buyer agrees to pay. The buyer’s note is included in the selling price at fair market value. This is generally the discounted amount that a bank or other party will pay for the note.

Sale of mortgaged property.

The selling price includes the amount of the unpaid mortgage. This is true whether or not you are personally liable on the debt, and whether or not the buyer assumes the mortgage or merely takes the property subject to the mortgage. The full amount of the unpaid mortgage is included, even where the value of the property is less than the unpaid mortgage. Computing amount realized on foreclosure sales is discussed in Chapter 31 (31.9).

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image Caution
Mortgaged Property
When you sell mortgaged property, you must include the unpaid balance of the mortgage as part of the sales price received, in addition to any cash.
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If, at the time of the sale, the buyer pays off the existing mortgage or your other liabilities, you include the payment as part of the sales proceeds.

EXAMPLES
1. You sell property subject to a mortgage of $60,000. The seller pays you cash of $30,000 and takes the property subject to the mortgage. The sales price or “amount realized” is $90,000.
2. A partnership receives a nonrecourse mortgage of $1,851,500 from a bank to build an apartment project. Several years later, the partnership sells the project for the buyer’s agreement to assume the unpaid mortgage. At the time, the value of the project is $1,400,000 and the partnership basis in the project is $1,455,740. The partnership figures a loss of $55,740, the difference between basis and the value of the project. The IRS figures a gain of $395,760, the difference between the unpaid mortgage and basis. The partnership claims the selling price is limited to the lower fair market value and is supported by an appeals court. The Supreme Court reverses, supporting the IRS position. That the value of property is less than the amount of the mortgage has no effect on the rule requiring the unpaid mortgage to be part of the selling price. A mortgagor realizes value to the extent that his or her obligation to repay is relieved by a third party’s assumption of the mortgage debt.
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