What Is Amount Realized?

Amount realized is the total amount received from a sale transaction. It factors in cash, the fair market value (FMV) of any assets, existing liabilities, as well as sales expenses.

Key Takeaways

  • Amount realized is the total amount received from a sale transaction.
  • It encompasses all forms of compensation, including cash, the FMV of any property received, and any liabilities that the purchaser assumes as a result of the transaction.
  • It also factors in selling expenses, such as redemption fees, advertising and legal fees, commissions, and exit charges.
  • Amount realized is used to calculate realized taxable gains and losses.

Understanding Amount Realized

Amount realized is the amount received from the sale of an asset or financial instrument. It encompasses all forms of compensation, including cash, the FMV of any property received, and any liabilities that the purchaser assumes as a result of the transaction. It also factors in selling expenses, such as redemption fees, advertising and legal fees, commissions, and exit charges.

The amount realized differs from realized income, which is money you receive for goods or services, and is used to calculate realized taxable gains and losses. To calculate a realized gain or loss, take the difference of the total consideration given and subtract the cost basis. If the difference is positive, it is a realized gain. If the difference is negative, it is a realized loss.

Amount realized is different from amount recognized, which is defined as taxable income received or a deductible loss.

Amount Realized Calculation

The total consideration will also include any liabilities assumed, as illustrated in this example:

Suppose you have sold a property that has an outstanding mortgage of $75,000. Selling costs are $3,000. The buyer pays you $40,000 and assumes the mortgage.

The amount realized is, in this case, a realized gain of $112,000 ($40,000 payment + $75,000 mortgage transferred - $3000 selling costs).