Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
Figuring Amount Realized
The amount you realize from a sale or exchange is the total of all the money you receive plus the fair market value (defined below) of all property or services you receive.
The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.
Gain or Loss From Sales and Exchanges
You usually realize gain or loss when property is sold or exchanged.
A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis.
A loss occurs when the adjusted basis of the property is more than the amount you realize on the sale or exchange.
The amount realized represents the total selling price, and includes:
- Cash
- The fair market value of property received in addition to the cash received
- Any of your liabilities that the buyer agrees to pay or assume.
Cancellation of a Lease
Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property.
Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received.
Buyer's Promissory Note
The buyer's promissory note is included in the selling price at fair market value. This is usually the discounted amount that a bank or other party will pay for the note.
Example 1.
- You used a building in your business that cost you $70,000
- You made permanent improvements costing $20,000
- You deducted depreciation totaling $10,000
- You sold the building for the following:
- Cash: $100,000
- Property: Fair market value of $20,000
- Buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building
- Selling expenses were $4,000.
Your gain on the sale is figured as follows:
| Cash | $100,000 | |
| Fair market value of property received | 20,000 | |
| Real estate taxes assumed by buyer | 3,000 | |
| Mortgage assumed by buyer | 17,000 | |
| Total | 140,000 | |
| Minus: Selling expenses | (4,000) | |
| Amount Realized | $136,000 | |
| Adjusted basis: | ||
| Cost of building | $70,000 | |
| Add: Improvements | 20,000 | |
| Total | $90,000 | |
| Minus: Depreciation | (10,000) | |
| Adjusted basis | $80,000 | |
| Gain on sale | $56,000 |
Example 2.
- You own a building that cost you $120,000.
- You use the building in your business.
- The building is a MACRS asset.
- You replaced the old elevator in the building and sold it for $1,000.
- You determine the cost of the portion of the building attributable to the old elevator is $5,000.
- Depreciation deducted on the old elevator portion of the building was $2,500 before its sale.
- The sale of the elevator is a sale of a portion of a MACRS asset, the building.
Your loss on the sale of the elevator is figured as follows:
| Cash | $1,000 | |
| Cost of elevator | $5,000 | |
| Minus: Depreciation | (2,500) | |
| Adjusted basis | $2,500 | |
| Loss on sale | ($1,500) |
Example 3:
- You own a bulldozer that cost you $30,000.
- You use the bulldozer in your business.
- The bulldozer is a MACRS asset.
- You replaced the old bucket on the bulldozer and sold it for $800.
- You determine the cost of the portion of the bulldozer attributable to the old bucket is $4,000.
- Depreciation deducted on the old bucket portion of the bulldozer was $3,800 before its sale.
- The sale of the bucket is a sale of a portion of a MACRS asset, the bulldozer.
Your gain on the sale of the bucket is figured as follows:
| Cash | $800 | |
| Cost of bucket | $4,000 | |
| Minus: Depreciation | (3,800) | |
| Adjusted basis | $200 | |
| Gain on sale | $600 |
Interest in Property
The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances.
If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain.
Your basis in the property is disregarded. This rule does not apply if all interests in the property are disposed of at the same time.
Example 1.
Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. You decide to sell your life interest in the farm. The entire amount you receive is a recognized gain. Your basis in the farm is disregarded.
Example 2:
The facts are the same as in Example 1, except that your brother joins you in selling the farm. The entire interest in the property is sold, so your basis in the farm is not disregarded.
Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm.
Foreclosures and Repossessions
If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property.
The foreclosure or repossession is treated as a sale or exchange from which you may realize a gain or loss. This is true even if you voluntarily return the property to the lender.
You may realize ordinary income from the cancellation of debt if the loan balance is more than the fair market value of the property.
Buyer's (borrower's) gain or loss:
You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange.
The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.
Amount realized on a nonrecourse debt:
If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer.
The full canceled debt is included even if the fair market value of the property is less than the canceled debt.
Example 1:
- Chris bought a new car for $15,000.
- He paid $2,000 down.
- He borrowed the remaining $13,000 from the dealer's credit company.
- Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security.
- The credit company repossessed the car because he stopped making loan payments.
- The balance due after taking into account the payments Chris made was $10,000.
- The fair market value of the car when repossessed was $9,000.
The amount Chris realized on the repossession is $10,000. That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000.
Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). He has a $5,000 nondeductible loss.
Example 2:
- Abe paid $200,000 for his home.
- He paid $15,000 down.
- He borrowed the remaining $185,000 from a bank.
- Abe is not personally liable for the loan (nonrecourse debt), but pledges the house as security.
- The bank foreclosed on the loan because Abe stopped making payments.
- When the bank foreclosed on the loan, the balance due was $180,000.
- The fair market value of the house was $170,000
- Abe's adjusted basis was $175,000 due to a casualty loss she had deducted.
The amount Abe realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. He figures his gain or loss by comparing the amount realized ($180,000) with his adjusted basis ($175,000). Abe has a $5,000 realized gain.
Amount realized on a recourse debt:
If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of:
- The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or
- The fair market value of the transferred property.
You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. The amount realized does not include the canceled debt that is your income from cancellation of debt.