The 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).
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.