In general, if you transfer property to a corporation in exchange solely for the corporation’s stock, and immediately after the transfer, you, together with all other persons who also transferred property as part of the same transaction, are in “control” of the corporation, you won’t recognize gain or loss on the transaction. (However, persons who receive stock for services don’t count towards the control requirement even if they also transfer a nominal amount of property.) The basis you had in the contributed property becomes the basis you get in the stock you receive as well as the basis the corporation gets in the property.

For this purpose, “control” means the ownership of 80% by voting power of the voting stock of a corporation and 80% of the number of shares in each class of non-voting stock. A transferor who has entered into a binding commitment to dispose of stock to be received for the transfer of property doesn’t count towards the requisite 80% control.

If the transferors (in the aggregate) do not have control of the corporation immediately after the transfer, each transferor recognizes gain or loss equal to the difference between his basis in the transferred property and the value of the stock received. Note, however, that even if loss is recognized it will not necessarily be deductible.

“Boot.” Even if the control test is met, you may still have to recognize gain if you receive cash or property (“boot”) other than stock of the transferee in exchange for your property. Debt securities are treated as boot for this purpose, as are certain types of redeemable or adjustable-rate preferred stock. If the transaction includes the receipt of boot, you recognize the lesser of (a) the gain realized as to the property (i.e., the excess, if any of the amount received (including the value of the stock received) over your basis in the property transferred), or (b) the cash and other boot received. The basis you get in the stock is the basis you had in the property you transferred, plus gain recognized, minus boot received.

 Example: Vera transferred land, in which she had a basis of $12,000, to her 85%-controlled corporation in exchange for stock worth $20,000 plus $5,000 in cash (boot). Of her realized gain of $13,000 ($25,000 - $12,000), Vera must recognize $5,000, which is the lesser of the gain and the amount of boot received. Vera’s basis in the stock she gets is $12,000: the basis she had in the land, plus gain recognized ($5,000), minus boot received ($5,000).

Where boot is property other than cash, the amount of boot is the fair market value of the property. This value is also the basis the shareholder gets in the boot property.

Assumption of debt. If, as part of a transaction described above, the transferee corporation assumes, or takes property subject to, debt, (for example, if the property transferred is encumbered by a mortgage) the debt is ordinarily not treated as boot received by the shareholder for the purpose of determining gain, but is treated as boot for purposes of determining basis.

 Example: Tom contributes land to his controlled corporation in exchange solely for stock. The land was subject to a mortgage of $4,000. Tom’s basis in the land was $10,000 and its value was $20,000. Tom still recognizes none of his gain because no boot is treated as received for these purposes. Tom’s basis in the stock he gets, however, is just $6,000: the $10,000 basis he had in the land, minus the $4,000 debt (treated as boot for basis purposes).

However, an assumption of debt will result in gain recognition where the amount of the debt exceeds the contributing shareholder’s basis in all of the property (including cash) contributed. In this case the gain recognized will be the amount of the excess. But liabilities that will give rise to a deduction when paid (such as accounts payable of a cash method business contributed to the corporation) aren’t treated as liabilities for this purpose. Also, if the debt was taken on by the shareholder for a tax avoidance or nonbusiness purpose, it will be treated as cash received and thus as boot for gain purposes. Special technical rules determine how much of a liability is treated as assumed.

If a significant portion of the properties transferred are marketable stock or securities, including interests in a regulated investment company (RIC) or a real estate investment trust (REIT), there could be a transfer to an “investment company” on which gain would be recognized.