Crane v. Commissioner
The Court ruled that a woman who inherited a fully mortgaged apartment building, took depreciation deductions on it for years, and then sold it still subject to the mortgage, had to count the full mortgage amount as part of what she 'realized' on the sale for tax purposes.
The decision rejected the argument that her taxable gain should be measured only against the property's mortgage-free 'equity,' establishing that both the original tax basis and the sale proceeds of mortgaged property must be measured by the property's full value, not just the owner's equity in it.
“We conclude that the proper basis under § 113 (a) (5) is the value of the property, undiminished by mortgages thereon, and that the correct basis here was $262,042.50.”
The Court's core holding on how to value inherited mortgaged property for tax purposes.
How it got here: The Tax Court sided with the taxpayer's low basis theory but agreed the building wasn't a capital asset; the Court of Appeals reversed, and the Supreme Court took the case.
The Case in Depth
What happened
A woman inherited an apartment building from her husband in 1932, subject to a $255,000 mortgage that was worth exactly what the property itself was worth. She operated the building for nearly seven years, collecting rent and paying the mortgage's interest, and claimed yearly deductions for depreciation. In 1938, with the mortgage holder threatening foreclosure, she sold the building to a third party for a small cash payment, still subject to the mortgage.
The question before the Court
When a woman inherited an apartment building worth exactly the amount of its mortgage, and later sold it while still subject to that same mortgage, does the mortgage count as part of her taxable profit?
Why it matters
Anyone who buys, inherits, or holds mortgaged real estate and later sells it still carrying that debt now knows the mortgage balance counts as money received for tax purposes. This closes a way to claim large depreciation deductions during ownership while reporting almost no taxable gain at sale, shaping how landlords and investors nationwide calculate profits on leveraged property.
What changes now
This is a final merits decision resolving the tax dispute; there is no remand for further factual proceedings on the core issue. The ruling settles how taxpayers must compute basis and sale proceeds for mortgaged property going forward, though the Court explicitly left open how the rule would apply if a mortgage exceeded the property's actual value, a question it said was different from the one decided here.
What this does not decide
The Court expressly did not decide what happens when a mortgage's amount is greater than the property's actual value, or whether depreciation is allowed to an owner whose property is clearly worth less than the mortgage on it — those situations were left for another case.
Concurrences and dissents
How the Justices voted
Majority (1). Justice Vinson (author).
Dissent (1). Justice Jackson (author).
Dissent — Justice Jackson
“The mortgage debt was simply a subtraction from the value of what she did receive, and from what she sold.”Jackson's explanation of why he saw the mortgage as reducing value rather than creating taxable benefit.
Justice Jackson would have upheld the Tax Court's finding that the taxpayer acquired only a worthless equity, arguing that was a permissible factual finding given the mortgage was in default and equal to the property's value. He reasoned she never personally owed the debt, so the mortgage amount was simply subtracted from what she received and later sold, not a separate benefit received. He would have reversed the Court of Appeals and reinstated the Tax Court's ruling for the taxpayer. Read the full dissent →
How the Court got there
The legal reasoning, step by step
- The Court had to decide what 'property' means in the tax code's basis provision: does it mean the physical building and land themselves, or only the owner's equity above the mortgage? It looked first at ordinary dictionary meanings, finding that 'property' commonly refers to the physical thing or the owner's full rights in it, while 'equity' is a separate, narrower concept referring only to value above any liens.
- The Court also relied on long-standing Treasury regulations and estate-tax practice, which had for decades required property to be valued at its full worth, undiminished by mortgages, when computing basis after inheritance — giving that reading the weight of consistent administrative and congressional acceptance.
- The Court reasoned that treating a mortgaged owner's 'equity' as the basis would create serious practical problems: depreciation allowances would have to shrink to a fraction of the building's real physical wear, or would require impossible calculations from a zero or negative basis, undermining the point of allowing depreciation deductions at all.
- Applying the same 'full value' meaning of 'property' to the sale side of the transaction, the Court reasoned that when an owner who is not personally liable on a mortgage sells the property still subject to that mortgage, she receives a real economic benefit equal to the mortgage amount, just as if the debt had been assumed by the buyer or paid off directly — otherwise the transaction would absurdly look like a near-total loss.
- Because the taxpayer had already taken large depreciation deductions based on the property's full value during her ownership, the Court concluded that fairness and the structure of the tax code required her to also include the full mortgage amount in the sale proceeds, preventing what would otherwise amount to a double tax benefit on the same loss in value.