I contributed property and its loan to my corporation. Is the whole transfer automatically tax-free?

A property contribution can qualify for nonrecognition under Section 351 only when its requirements are met. Debt assumption introduces additional rules, including potential gain when liabilities exceed adjusted basis and exceptions for certain deductible liabilities. Control, transfer purpose and the actual property basis all matter.

A specific business-owner situation

A founder transfers appreciated equipment and its loan to a new corporation. The loan exceeds the equipment's adjusted tax basis, even though the corporation receives positive market equity.

Illustrative example, not a client result.

What to establish before filing

1. Test Section 351 control and property requirements.
2. Compare assumed liabilities with tax basis.
3. Calculate corporate and shareholder bases after any recognized gain.

Which fact changes the answer?

Tax basis differs from appraised value. A debt-covered asset can create gain even when its market value comfortably exceeds the loan.

A mistake to avoid

Positive fair market equity does not eliminate a liabilities-over-basis problem.

Records that support the decision

• Asset basis and depreciation records.
• Loan documents.
• Formation and stock issuance records.

The decision to document

Complete the liability and basis computation before treating the formation as entirely tax-free.

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Related questions

• The corporation bought all my shares, but my spouse still owns stock. Is sale treatment automatic?
• Can our corporation deduct the amount it spends to buy back its own shares?

Sources and editorial context

• IRS Publication 542: corporations

General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.