Question

In your post please discuss the following:

1. If a taxpayer sells or exchanges property, what are items that could be included in the calculation of the "amount realized"?

2. In your own words, explain "adjusted basis", what affects adjusted basis, and the reason adjusted basis is important for determining one's tax liability?

3. What is meant by "realized gain" versus "recognized gain"

4. Briefly discuss how the tax status (e.g., capital, ordinary, Section 1231 business use) of an asset affect the tax treatment of a realized gain or realized loss.

Answer 1

1) If a tax payer sells or exchanges property, then the total of all money received by tax payer, the fair market value (FMV) of the property, and any liability of tax payer relating to the property transferred by taxpayer such as real estate tax or any mortgage relating to property as per terms of agreement to sale of property.

2) “Adjusted basis” is the term which refers to the Original Cost of property after required adjustment like cost of improvement will be clubbed with the original cost of property and any decrease in the value of property will be reduce from the original cost of property which may include depreciation and any casual loss. Adjusted basis is also required to compute the gain or loss on sale of property or any disposed part of property.

3) Realized Gain: In case of sale of any property by tax payer and the benefits arise from this sale will be treated as the realized gain from sale of property. Realized gain may be generated from the sale of property or any part of property on the basis of adjusted basis of property.

Recognized Gain: However, the recognized gain is the part of realized gain which will be considered gain for tax purpose on sale of any property or part of property. Generally, the realized gain or recognized is same for tax purpose but in case of Section-1031 exchange transactions allows the tax to postponed the capital gain tax liability.

4) Classification of tax status of asset affects the tax treatment of realized gain or loss because there is different tax rates on different tax status therefore this classification is required for tax computation. This gain can be divided in ordinary gain, capital gain and any gain arise from transaction covered in Section-1231 on which different tax rate and compliances are there as per Internal Revenue Service (IRS).