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Mortgaged Property

There is a long-standing general principle in tax law: borrowing money is not taxable. Thus, if individuals sell a parcel of mortgaged property, the amount they realize is the net purchase price. This is true regardless of whether they actually get to pocket any equity or profit in the sale of the property. For example, assume a person buys a house for $100,000 and uses $50,000 of his own money and borrows the remaining $50,000 from a bank., The bank’s $50,000 is secured by a mortgage. Later, he sells it for $200,000, and assuming that his basis is then $80,000 after depreciation, his gain is $120,000, being the amount realized ($200,000) minus the basis. The amount of cash he receives will be $200,000 minus the amount of the mortgage, but that amount will have no particular bearing on the amount of gain.

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