2009 CCH. All Rights Reserved.
Property Transactions: Determination of
Basis and Gains and Losses
SUMMARY OF CHAPTER
Chapter 10 is concerned with the realization and recognition of gain or loss and with the determination of
basis under varying circumstances including: an ordinary purchase, a bargain purchase, acquisition through gift,
acquisition through inheritance, conversion of property from personal use to business use, nontaxable and taxable
stock dividends and stock rights, and wash sales.
Factors in Determining Gain or Loss
nition of Realized Gain or Loss
Realized gain or loss is the difference between the amount realized from the sale or other disposition of
property and the adjusted basis at the time of sale or disposition. If the amount realized exceeds the adjusted basis,
there is a realized gain. On the other hand, if the adjusted basis exceeds the amount realized, there is a realized loss.
¶10,015 Amount Realized
The amount realized from the sale or other disposition of property is the sum of any money received plus
the fair market value of other property received. The amount realized from a sale or other disposition of property
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 selling expenses.
¶10,025 Adjusted Basis
The adjusted basis is the original basis plus capital expenditures minus capital returns. Capital expenditures
are costs chargeable to the capital account such as improvements, betterments, acquisition costs, purchase
commissions, and legal costs for defending title. Capital returns include depreciation, depletion, amortization,
tax-free dividends, compensation or awards for involuntary conversions, deductible casualty losses, insurance
reimbursements, and cash rebates received by a purchaser.
¶10,035 Recognition and Nonrecognition of Gain or Loss
If a realized gain or loss is recognized, the gain is includible and the loss is deductible in determining
taxable income. Thus, “recognition” means that the result of a particular transaction is considered to be taxable
income or a deductible loss. Generally, recognition occurs at the time of sale or exchange. There are, however,
certain situations where the realized gain or loss will not be recognized, as in the case of like-kind exchanges,
involuntary conversions, or sale of residences as will be seen in the next chapter. There are also situations where a
realized gain may be recognized, but realized losses are not recognized.
Determination of Basis
Basis is important in computing (1) gain or loss on sale or disposition of property and (2) MACRS or
depreciation deductions, cost depletion, and amortization. The determination of basis depends on how the asset was