Amount Realized for Gain or Loss Determination – Paul Gaulkin CPA

person holding for sale signThe amount realized from the sale or disposition of property is the sum of any money received plus the fair market value of other property received in the transaction. This does not include any amount received from the purchaser as reimbursement for real property taxes which are treated as imposed on the purchaser. However, it does include amounts representing real property taxes which are treated as imposed on the seller, if they are paid by the purchaser.

The amount realized from a sale or other disposition of property also includes the amount of liabilities from which the transferor is relieved as a result of the sale or disposition. The amount realized is reduced by any selling expenses incurred in the transaction.

Fair Market Value

The fair market value of the property is the price a willing buyer and a willing seller would reach after negotiating the transaction in a logical manner. Various sources provide evidence of value. Stock exchanges quotations are considered to provide evidence of fair market value of the company that are to represent. Sales of similar property on the open market are also evidence of value, and the opinion of appraisers or experts is generally given significant weight.

Amount Realized Formula

The basic formula for determining the amount realized is:

Start with cash received
+ Fair market value of property and services rendered
+ Liabilities of seller assumed by buyer
Selling expenses
= Amounts Realized

Real World Example

Assume James owns land worth $40,000 which is subject to a $16,000 mortgage. She sells it to Jenny who pays $24,000 cash and also assumes the mortgage. She incurs $2,000 selling expenses. James amount realized is $38,000 ($24,000 + $16,000 – $2,000).

Amount Recognized

It is important to keep in mind that a taxpayer may realize an amount that is different from the amount they must recognize on a transaction to the IRS. The amount that must be recognized on a transaction is the amount that will generally be taxable to the taxpayer if they have a gain.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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