What is the tax basis under the Crane Doctrine?

Question

My understanding is that under Crane doctrine the tax basis of the property to begin with is Equity Invested + Financing (recourse or nonrecourse doesn't matter). i.e. 20K down + 80K purchase money mortgage = 100K. What if the property is appraised for only 80K right before purchase but purchaser paid 100K? Is the tax basis 80K or 100K.

In other words, is the tax basis the actual assessed value of the property or is the tax basis the total investment?

Thanks,
Ben

Answer 1

Your understanding of Crane is correct. For purposes of calculating the gain on sale, the basis would be $100k. What Crane really said was that the net proceeds would have to include any assumed debt, in addition to any cash received -- basically that you had to include the debt on both ends of the transaction if my reading is correct. (That jives with the example in Commissioner v Tufts et al, 81-1356 so I think we're correct on that.)

Where basis gets interesting is when you are calculating depreciation. At least when you convert a residential property to business use -- i.e. a rental -- you use the LESSER of the cost basis (Crane) or the FMV on the date that the property is placed in business(rental) service. In your example, the depreciable basis would be $80k since that was the lower.

For calculating the gain on sale, the cost basis would still be $100k (adjusted down for any depreciation allowed or allowable while in business use of course).