Summary of Basis Rules When Exchanging Property for Stock of a Corporation

1. The basis in the stock you receive in an exchange is the adjusted basis of the property you transferred -

Increased by:

  • Any gain recognized by you, and
  • Any amount received by you that is treated as a dividend.

Decreased by:

  • Money received by you
  • The fair market value of other property received from the corporation
  • Any of your liabilities that the corporation assumes unless it's the type of the liability that would give rise to a deduction by the corporation (e.g., accounts payable do not reduce your stock basis)
  • Any loss you recognized on the exchange
    • Note that, you may not recognize a loss if you own more than 50% of the stock.

2. The corporation's basis in property it receives from you is the same as the adjusted basis you had in the property when it was transferred -

Increased by:

  • Any gain recognized by you in the exchange.

3. Liabilities assumed by the corporation:

For basis purposes, liabilities assumed by the corporation from you are treated as if you received money. Therefore, they reduce your stock basis.

However, liabilities that are assumed do not reduce your stock basis if they are of the type that would give rise to a deduction by the corporation (e.g., trade accounts payable or interest).

For gain recognition purposes, liabilities assumed by the corporation from you are not treated as if you received money or other property (they are ignored). However, if the liability exceeds the adjusted basis in the property transferred, then gain is recognized, but only for the excess amount.

4. Services for Stock:

The basis in stock received in an exchange for services is the fair market value of the services you provide (plus any money and the fair market value of other property you transfer to the corporation).

The value of the services are taxed to you as ordinary income. The corporation gets a deduction for the value of the services.

To be part of the Section 351 transferor group (if other people are involved with you in the exchange), you must contribute at least 10% of the value of the services in the form of money or other property to the corporation.

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