5.13 Calculating Gain or Loss

In most cases, you know if you have realized an economic profit or loss on the sale or exchange of property. You know your cost and selling price. The difference between the two is your profit or loss. The computation of gain or loss for tax purposes is similarly figured, except that the basis adjustment rules may require you to increase or decrease your cost or selling price and the amount-realized rules may require you to increase the selling price. As a result, your gain or loss for tax purposes may differ from your initial calculation.

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image Planning Reminder
Records for Rental Property Improvements
Keep records of permanent improvements and legal fees for rental property. These increase your basis and lower any potential gain when you sell the property.
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EXAMPLE
You sell rental property to a buyer who pays you cash of $50,000 and assumes your $35,000 mortgage. You bought the property for $55,000 and made $12,000 of permanent improvements. You deducted depreciation of $7,250. Selling expenses were $2,000. Your gain on the sale is $23,250, figured as follows:
1. Amount realized (5.14)
Cash $50,000
Mortgage assumed by buyer   35,000
$85,000
2. Original cost   55,000
3. Plus improvements   12,000
$67,000
4. Minus depreciation     7,250
5. Adjusted basis   59,750
6. Plus selling expenses*     2,000
7. Total cost: Combined result of Lines 2–6   61,750
8. Gain: Subtract Line 7 from Line 1 $23,250

Worksheet 5-A Figuring Gain or Loss on Form 8949 and Schedule D

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*Selling expenses on Form 8949 and Schedule D.

As discussed in 5.8, IRS instructions require you to enter selling expenses as a negative adjustment on Form 8949 unless the broker reported net sale proceeds (gross proceeds less selling expenses) on Form 1099-B.

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