## Facts

- A taxpayer inherited an apartment building and lot encumbered by a mortgage with principal and accrued interest; the property’s estate-tax value equaled the encumbrance.
- The taxpayer operated the property for several years under an arrangement remitting net rents to the mortgagee.
- During ownership, the taxpayer reported rental income and claimed deductions for operating expenses, interest, taxes, and depreciation.
- Facing foreclosure, the taxpayer sold the property to a third party for cash, with the buyer taking the property subject to the existing mortgage; the taxpayer also paid selling expenses.
- The taxpayer reported gain using a theory that she owned and sold only a zero-value equity, so the amount realized was limited to net cash received.
- The Commissioner determined a substantially larger gain by treating the transaction as a disposition of the entire property and including the mortgage balance in the amount realized.

## Issues

1. For inherited property subject to an unassumed mortgage, whether the unadjusted basis is the full value of the property or only the taxpayer’s equity.
2. Whether depreciation is computed on that full basis and must reduce basis to produce adjusted basis for gain computation.
3. Whether the amount realized on a cash sale “subject to” a mortgage includes the cash received plus the outstanding mortgage amount when neither party assumes personal liability.

## Decision

- The Supreme Court affirmed the court of appeals and sustained the Commissioner’s approach.
- The unadjusted basis of inherited property subject to an unassumed mortgage is the value of the property undiminished by the mortgage amount.
- Depreciation allowable during the holding period reduces that full initial basis to determine adjusted basis.
- The amount realized on a sale for cash subject to a mortgage includes both the cash received and the amount of the mortgage, even if the mortgage is not personally assumed by the seller or buyer.
- The Court also held the appellate court had jurisdiction to review the Tax Court’s legal determinations and rejected the claim that the statute, as applied, taxed non-income under the Sixteenth Amendment.

## Legal Principles

- “Property” for basis purposes refers to the physical asset (and the owner’s rights in it), not merely residual equity after liens.
- A taxpayer who claims depreciation based on the full value of encumbered property must compute adjusted basis by subtracting depreciation from that full basis.
- Disposition of property subject to nonrecourse or unassumed mortgage debt produces an amount realized that includes debt relief measured by the outstanding mortgage balance, in addition to any cash received.
- Including the mortgage amount in both basis and amount realized is consistent with taxing gain from dealings in property as income.

## Conclusion

The Court held that when a taxpayer inherits depreciable property subject to a mortgage and later sells it subject to that mortgage, the taxpayer’s basis includes the full property value (not merely equity), depreciation reduces that basis, and the amount realized includes the cash received plus the remaining mortgage balance.


Crane v. Commissioner, 331 U.S. 1 (1947)