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” (defined below) of the corporation, you won't recognize gain or loss. (However, persons who receive stock for services don't count towards the control requirement, even if they also transfer a nominal amount of property.)

Your basis for the contributed property carries over to the corporation and also becomes your basis for the stock you receive. However, if the corporation's carryover basis for all the property you transfer is more than the property's fair market value immediately after the contribution, the corporation's basis is reduced to the property's fair market value under a carryover basis limit rule. If this rule applies, you and the corporation can jointly elect to apply the basis reduction to the basis of the stock you receive, instead of the corporation's basis in the property. If property you will be contributing has declined in value so these rules are relevant, please let us know so we can discuss this further.

Control. “Control” means the ownership of 80% of the voting power of the voting stock of the corporation's voting stock 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 80% control requirement.

If the persons transferring the property (together) do not “control” the corporation immediately after the transfer, each transferor recognizes gain or loss equal to the difference between his or her 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 also becomes the shareholder's basis for the boot property. The corporation's basis for the transferred property is increased by the gain recognized by a transferor, subject to the above basis limit rule.

Assumption of debt. If, as part of a transaction described above, the transferee corporation assumes, or takes property subject to, liabilities (for example, if the property transferred is encumbered by a mortgage), the liabilities are ordinarily not treated as taxable boot received by the shareholder, but are treated as boot in determining basis. However, if the liabilities exceed the shareholder's basis for the property, gain will ordinarily be recognized by the shareholder.

Following is an example of the effect of a mortgage where gain is not recognized by the transferor:

 Example. Tom contributes land to his controlled corporation in exchange solely for stock. The land was subject to a $4,000 mortgage. Tom's basis in the land was $10,000 and its value was $20,000. Tom still doesn't recognize any gain because boot is not 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).

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.