Week 7 Assignment Solutions Gain or Loss: Realized vs. Recognized 10-1 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. If the adjusted basis exceeds the amount realized, there is a realized 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. Gain or Loss: Sale of Stock 10-47 Basis per share of stock purchased on April 18, 2012: $7 ($210 ÷ 30). Basis per share of stock purchased on September 29, 2012: $10 ($900 ÷ 90). Sale on November 28, 2012: 30 shares (all of 4-18-12 purchase) $ 210 18 shares (18 of 9-29-12 purchase) 180 Basis under FIFO $ 390 Selling price $ 576 Less: Basis 390 Gain $ 186 Sale on December 8, 2012: Selling price $ 188 Less: Basis (25 × $10) 250 Loss ( $ 62) Combining the two sales: Gain $ 186 Loss ( 62) Net gain $ 124 Like-Kind Exchanges: Basis and Gain or Loss 11-40 Debbie has realized gain of $3,000, recognized gain of $3,000, and the basis of the new property is $10,500. FMV received ($10,500 + $4,500) $15,000 Less: Basis given 12,000 Gain realized $ 3,000 Gain recognized $ 3,000 Method I: Basis of old property $12,000 Plus: Gain recognized 3,000 Less: Boot received 4,500 Basis of new property $10,500 Method II: FMV of property received $10,500 Less: Deferred gain 0 Basis of new property $10,500 Elizabeth has $1,500 gain realized, no recognized gain, and the basis of her property is $13,500. FMV received $15,000 Less: Basis given ($9,000 + $4,500) 13,500 Gain realized $ 1,500 Gain recognized 0 Method I: Basis of old property $ 9,000 Plus: Boot given 4,500 Basis of new property $13,500 Method II: FMV of property received $15,000 Less: Deferred gain 1,500 Basis of new property $13,500 Holding Period: Like-Kind Exchange 12-34 In a nontaxable exchange such as Jim had where he uses the basis of $40,000 that he had in his old asset as the basis of his new asset, the holding period begins with the day following the date of acquisition of the old property, or November 18, 2011. In other words, the holding period of the old asset is tacked on. Section 1231 Assets: Includible Property 12-48 Items (a), (c) and (e) are Section 1231 assets. Machinery used in the business, a factory building, and land used in a business are all Section 1231 assets. A personal home is a capital asset as is the land held as an investment and the shares of stock in Jones Corporation. The inventory is an ordinary asset as is the musical composition held by the composer.