J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

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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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 ...