Amount Realized

The term is defined in section 1001(b) and widened by the liability rules in the regulations.

Section 1001(b) says the amount realized is "the sum of any money received plus the fair market value of the property (other than money) received." It also adjusts for real property taxes: reimbursements for taxes treated as the buyer's under section 164(d) are left out, and the seller's share of taxes the buyer pays is included.

Reg. section 1.1001-2(a)(1) adds the amount of liabilities from which you are discharged as a result of the sale. Paragraph (b) says the value of the property securing the debt does not matter, so the full liability counts even when the property is worth less.

Publication 544 includes liabilities assumed by the buyer, such as a mortgage or real estate taxes, and its worked example subtracts selling expenses to reach the figure compared with adjusted basis.

The figure is the same whether the transaction is a sale or an exchange. What section 1031 changes is how much of the resulting gain is recognized, not how the amount realized is measured.

In a hypothetical sale, the mortgage is part of what you realize even if it never reaches you.

Hypothetically, a buyer pays you $750,000 and assumes your $450,000 mortgage, and you pay $60,000 of commissions and other selling costs. Your amount realized is $1,140,000. With an adjusted basis of $500,000, your realized gain is $640,000.

If the buyer instead paid $1,200,000 and your lender was paid off from the proceeds, the amount realized would be the same $1,140,000. Run your own numbers with your CPA.

In an exchange, giving up an unencumbered property for a replacement worth $1,200,000, and paying $60,000 of exchange expenses, would produce the same $1,140,000 amount realized. The replacement's value simply takes the place of the cash price.

It bites in exchanges and on underwater properties, where the figure is bigger than the cash.

In Reg. section 1.1031(d)-2, Example 1, an apartment owner received a $600,000 building, $50,000 in cash and relief from a $150,000 mortgage: total consideration of $800,000, less a $500,000 basis, for a $300,000 realized gain. How much of that is taxed now is the subject of realized gain vs recognized gain.

Because debt relief is part of the amount realized, reinvesting only your cash can leave boot. The 1031 exchange equation guide and whether you must reinvest the whole sale price or only the gain show how the figure sets the target; your basis side is in calculating adjusted basis.

Foreclosure is the extreme case. Publication 544's nonrecourse example treats the full $180,000 loan balance as amount realized although the house was worth $170,000, because the whole debt was discharged.