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What if property is mortgaged?
If mortgaged property is sold, the amount realized is the net purchase price, regardless whether the seller receives any of it. This is consistent with the rule that borrowing money is not taxable. For example, if you buy a house for $150,000 putting up $50,000 of your own money and borrowing $100,000 from a bank secured by a mortgage, and sell it for $210,000, assuming that your basis (discussed below) is then $80,000 after depreciation, your gain is $130,000, being the amount realized ($210,000) less your basis. The amount of cash received will be $210,000 minus the amount of the mortgage but that amount will have no particular relationship to the amount of gain.
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