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encumbered with a senior lien. Like the cited cases,
petitioner’s basis in the Atascadero property is its fair market
value, but the existence of the Great Western mortgage requires
additional explanation as to how we arrive at the fair market
value basis.
In the case at hand, petitioner’s recourse debt, owed him by
Stephanie and David on the Atascadero loan, was satisfied to the
extent of $38,543, the amount by which the property’s fair market
value--$207,500--exceeded the Great Western note secured by the
first deed of trust--$168,957--and is a “cost” of the property to
petitioner.
In addition, petitioner took the property subject to the
Great Western note secured by the first deed of trust, which had
an outstanding balance of $168,957 on the date petitioner
acquired the property. A purchaser’s basis under section 1012
includes genuine indebtedness to which the property is subject.
Estate of Franklin v. Commissioner, 544 F.2d 1045, 1049 (9th Cir.
1976), affg. 64 T.C. 752 (1975); Bertoli v. Commissioner, 103
T.C. 501, 515 (1994). The genuine nature of the Great Western
loan is not in dispute; petitioner respected the debt to which
the property was subject and made payments on the Great Western
loan to protect his interest in the Atascadero property. The
outstanding balance on the Great Western loan–-$168,957–-is
included in petitioner’s cost basis.
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