Amount Realized: Everything You Need to Know
The amount realized can be calculated by looking at the amount of money that was received from a sale.3 min read
2. Are Taxes Used to Calculate Amount Realized?
3. How Is the Fair Market Value Determined?
4. Example of Calculating the Amount Realized
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.
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 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.
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.
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