In the previous lesson we discussed Tax Credits. In this lesson we will discuss Property
Transactions: Determination of Gain, Loss, Basis Considerations, and Nontaxable Exchanges
he sale or other disposition of property: Is there a realized gain or loss? If so, is the gain or loss
recognized? If the gain or loss is recognized, is it ordinary or capital? And what is the basis of
any replacement property that is required? This lesson discusses the determination of realized and
recognized gain or loss and the basis of property.
After completing this lesson, you should be able to: Understand the computation of realized gain
or loss on property dispositions, Distinguish between realized and recognized gain or loss, Apply
the recovery of capital doctrine, Explain how basis is determined for various methods of asset
acquisition, Describe various loss disallowance provisions, Understand the rationale for
nonrecognition, or postponement, of gain or loss in certain property transactions, Apply the
nonrecognition provisions and basis determination rules for like-kind exchanges, Explain the
nonrecognition provisions available on the involuntary conversion of property, Describe the
provision for the permanent exclusion of gain on the sale of a personal residence, and Identify
other nonrecognition provisions contained in the Code.
Realized gain or loss is the difference between the amount realized from the sale or other
disposition of property and the property's adjusted basis on the date of disposition. If the amount
realized exceeds the property's adjusted basis, the result is a realized gain. Conversely, if the
property's adjusted basis exceeds the amount realized, the result is a realized loss.
The term “sale
or other disposition” is defined broadly in the law and includes virtually any disposition of
property. The amount realized from a sale or other disposition of property is the sum of any
money received plus the fair market value of other property received.
A sale or disposition
includes trade-ins, casualties, condemnations, thefts, and bond retirements. The fair market value
of property received in a sale or other disposition has been defined by the courts as the price at
which property will change hands between a willing seller and a willing buyer when neither is
compelled to sell or buy. Recognized gain is the amount of realized gain that is included in the
taxpayer’s gross income. A recognized loss, on the other hand, is the amount of a realized loss
that is deductible for tax purposes. As a general rule, the entire amount of a realized gain or loss
In certain cases, a realized gain or loss is not recognized upon the sale or other disposition of
property. One such case involves nontaxable exchanges. Others include losses realized upon the
sale, exchange, or condemnation of personal use assets, and gains realized upon the sale of a