Key Takeaways

  • The amount realized refers to the total value received from the sale or exchange of an asset, including cash, fair market value of property, and liabilities assumed by the buyer.
  • It is used to calculate capital gains or losses by comparing it to the asset’s adjusted basis.
  • Selling expenses reduce the amount realized, while liabilities transferred to the buyer increase it.
  • The amount realized can include non-cash considerations, such as services or other assets.
  • Distinct from amount recognized, which refers to the portion of gain or loss actually reported on a tax return.
  • The IRS may defer recognition of some realized gains through specific provisions like like-kind exchanges.

The amount realized can be calculated by looking at the amount of money that was received from a sale. This doesn't necessarily mean the amount received is always in cash form, though. It can relate to all forms of compensation. For example, if someone gives a person a piece of property, the amount received is the fair market value of the property. Sometimes, the amount received can also include liabilities.

When calculating the amount received, you do not include any type of commission or fees that were involved in the transaction amount. The purpose of calculating the amount received is to determine the actual amount of gain or loss. This is also known as a realized loss or a realized gain.

How to Calculate the Amount Realized

Calculating the amount realized is quite simple. All you have to do is take the difference of the total amount gained (or lost) and subtract it from the actual cost of the product. If the number calculated is positive, this means it is a realized gain. If, however, it is a negative number, this means it's a realized loss.

You will need to take into account any liabilities assumed in the transaction. For example: If you have sold a piece of property that is attached with an outstanding mortgage of $100,000, and the buyer pays you $50,000 and takes on the mortgage, this means you have gained, $150,000. The realized gain is $150,000.

When an asset is exchanged, the amount realized is the amount of the loss or gain. The payment itself that is attached to the transaction can be in many forms. Some people use cash as a payment method. Others may use another asset to serve as the payment. And then some people will reduce the amount of existing obligation to serve as the payment.

What Is Included in the Amount Realized

The amount realized encompasses more than just the cash received from a transaction. According to IRS standards, the total amount realized includes:

  • Cash received from the buyer
  • Fair market value (FMV) of any property received
  • Liabilities assumed by the buyer, such as a mortgage or outstanding debts
  • Services rendered in exchange for the asset
  • Other forms of compensation, such as installment payments or notes

This comprehensive view ensures all economic benefits from the transaction are considered when calculating taxable gains or losses.

Are Taxes Used to Calculate Amount Realized?

Although fees and commissions are not considered when calculating an amount realized, any real property taxes are, but only if they are paid by the person buying the property. As noted above, you do include liabilities, such as an owed mortgage, into account when calculating the amount received. The amount assumed by the purchaser adds to the gain of the seller. The amount realized, however, is reduced by any selling expenses that were a part of the transaction, such as marketing the property as being for sale.

How Amount Realized Differs from Amount Recognized

While the amount realized reflects the full value received in a transaction, the amount recognized refers to the portion of gain or loss that must be reported for tax purposes.

In some cases, the IRS defers recognition of certain gains—such as those involved in like-kind exchanges under Section 1031—even though the full amount was realized. This distinction is critical for taxpayers aiming to understand how much will impact their current tax liability.

How Is the Fair Market Value Determined?

The fair market value of a piece of property is determined by the buyer and seller. The two must come together to negotiate an amount that is reasonable for the property. There are various sources of evidence that can be used to calculate the fair market value. In some instances, stock exchange quotations will be used to determine the fair market value of a piece of property.

The buyer and seller can also look at sales attached to similar properties to calculate the fair market value. Additionally, appraisers and experts can be brought in to further shine a light on what the fair market value should be.

Common Non-Cash Considerations in Transactions

Not all transactions involve direct payment in cash. The amount realized may also include:

  • Bartered property or other tangible goods
  • Stock or securities received in mergers or acquisitions
  • Debt relief, such as the assumption of liabilities
  • Services exchanged for property or rights

In these cases, the fair market value of the item or service received is used in calculating the total amount realized.

Example of Calculating the Amount Realized

There is a simple calculation that can be used to determine the amount realized when a piece of property is sold:

  • You start by taking the cash received and adding the fair market value of the property.
  • You also add any liabilities that the purchaser assumed.
  • Next, you subtract the selling expenses, and this gives you your amount realized.

Here is another example of calculating the amount realized. Zac owns a piece of land that is worth $40,000, but he also has a $15,000 mortgage attached to it. He sells it to Sarah who pays $30,000 in cash and also assumes the $15,000 mortgage. In selling the property, Zac incurred $3,000 in selling expenses. The amount realized is calculated as $30,000 + $15,000 - $3,000 = $42,000.

At first, calculating the amount realized seems incredibly simple, but when you throw debt into the picture, such as a mortgage and even a second mortgage, this can make things a bit complicated. And then when you add in incurred selling costs, this can further complicate the entire calculation process, and it can blur the lines of determining whether a loss or gain was realized.

Adjustments That Affect the Amount Realized

Several factors can increase or decrease the final amount realized:

Additions to Amount Realized:

  • Buyer assumes seller’s debt (e.g., mortgage, loan)
  • Payment in appreciated property
  • Interest earned and included in sale price

Reductions to Amount Realized:

  • Selling expenses (broker commissions, advertising fees)
  • Transfer taxes or other closing costs borne by the seller
  • Legal fees associated with the sale

Understanding these adjustments helps in accurately reporting and planning for capital gains taxes.

Frequently Asked Questions

  1. What is the difference between amount realized and amount recognized?
    The amount realized is the total value received from a transaction, while the amount recognized is the portion of that gain or loss that is subject to taxation.
  2. Does assuming a mortgage count toward the amount realized?
    Yes, if a buyer assumes a mortgage or any debt as part of the transaction, that liability is included in the amount realized by the seller.
  3. Are selling costs included in the amount realized?
    Selling costs reduce the amount realized. These may include commissions, legal fees, and marketing expenses.
  4. Is fair market value always used in non-cash transactions?
    Yes, when property or services are exchanged instead of cash, their fair market value is used to determine the amount realized.
  5. Can services received be included in the amount realized?
    Yes, the fair market value of services provided in exchange for an asset must be included in the amount realized.

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