Computation of Gain and Loss
Helpful documents: Property Basis Trade In - Property Basis New Equipment Purchase - EQUIPMENT ADDITIONS (an html version for those not using Excel) -
I am writing in response to your phone call inquiring as to the proper tax treatment of
the various components of a major financing restructuring that you are planning with
respect to your land investments. Generally, gain or loss is realized with respect to the
arrangements that you are planning if they are sales or deemed sales. If they are, you
must compute gain or loss realized. In other memoranda to you, I discuss whether any gain
must be reported for tax purposes, whether any loss is deductible, and the
characterization of these gains and losses. In this letter I shall attempt to briefly
summarize the tax treatment of your proposal insofar as gain or loss realized is
concerned. Once you have reviewed the facts of your case in light of this analysis, I
suggest that we get together again in order to discuss your situation.
Generally, gain or loss is realized if a realization event occurs with respect to the
property. A realization event occurs when you sell, exchange, or otherwise dispose of
property in a manner that terminates or significantly reduces your interest in the
property. Thus, realization events occur with respect to any sales you make, exchanges of
property for other property, and the granting of easements in exchange for cash or
property. However, realization events do not occur if you make a gift of the property
without any mortgages being assumed or if you merely pledge the property as collateral for
loans that you procure.
If a realization event occurs and gain or loss is realized, you must compute the amount of
that gain or loss. Gain realized is the excess of what you receive (technically called
"amount realized") over your adjusted basis in the property. Loss realized is
the excess of your adjusted basis in the land over your amount realized.
In other memoranda to you I summarize the determination of amount realized and the
computation of adjusted basis.
As you can see, determining whether a realization event has occurred can be simple or
difficult, depending on the circumstances. Because some of the ideas you mentioned
concerning your property involve fairly sophisticated transactions, I suggest you review
the facts carefully and contact me for a follow-up meeting.