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Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
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# How do I figure realized and recognized amounts (Numbers

How do I figure realized and recognized amounts?
(Numbers are rounded for easy math)
I purchased land for \$10,000. I then built a small office building for 90,000. I operated the building for rental income for 5 years. During that time I claimed 10,000 of depreciation and made principal payments on the outstanding debt in the amount of 50,000, plus interest.
I have recently sold the property they took over the mortgage and I recieved a check for 35,000.
Once again how do calculate my realized and recognized amount?
Thank you- Heidi

To make things a little easier - unless you do a 1031 exchange (which you apparently have not since you got a check), realized and recognized will be the same amount.

You start by determining your adjusted basis - original cost + cost of improvements - accumulated depreciation = 10,000 + 90,000 - 10,000 = \$90,000 adjusted basis.

Next you determine net selling price - stated sales price - commissions - other costs of selling (such as title insurance, attorney's fees, etc) = net selling price.

The difference between net selling price and adjusted basis is your realized (and recognized) gain.

The mortgage assumption does not really enter into the calculation except as a part of the "stated salesprice".

If your gain is \$10,000 or less, it will be a Section 1250 gain and subject to a maximum tax rate of 25%. If the gain is more than \$10,000, the first \$10,000 will be Section 1250 (as above) and the balance will be Section 1231 gain which, in all likelihood, will wind up being taxed as a long term capital gain with a maximum tax rate of 15%.

Your actual rates of tax could be lower depending on your specific circumstances.

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