Amount Realized

whenever we have a property transaction

the first place to go in tax is always

to calculate the realized gain or loss

the Gateway provision amount realized -

adjusted basis gives us realized gain or


what exactly is amount realized well

that's what this video is going to

discuss amount realized in common terms

deals what what actually am I getting as

a result the transaction what do I get

now the first thing that goes into the

amount realized is actual cash received

so the taxpayer receives cash as a

result of a property transaction the

amount of cash received goes into the

taxpayers amount real lives next is

constructive cash received now this one

is a little bit more of a fuzzy concept

you're thinking what exactly mean

constructive catch it really has to do

with liability relief and let me explain

why it matters let's say we have to

taxpayers taxpayer one and taxpayer two

taxpayer one is going to sell to

taxpayer to a house where $600,000 which

has a hundred thousand dollar mortgage

attached to it taxpayer two is gonna pay

five hundred thousand dollars cash to

haxe payer one you're looking at this it

makes sense the net equity in the house

which is worth $600,000 minus one

hundred thousand dollar mortgage is five

hundred thousand dollars so we're

concerned with a calculating the amount

realized for taxpayer one so taxpayer

one receives five hundred thousand

dollars cash from taxpayer two so actual

cash received is five hundred thousand

dollars next we ask is there any

constructive cash well this is where a

liability relief comes into play

liability relief is viewed as

constructive cash because it's as if

taxpayer two gives taxpayer one an

additional $100,000 cash and taxpayer

one then pays off the hundred thousand

dollar mortgage and the mortgage is no

longer there so this will be an

additional one

thousand dollars of cash and that term

is called constructive cash so again the

ideas that they are taking on the

liability it's as if the other party is

being relieved because they no longer

have any attachment with respect to that

liability when it comes to tax law

there's no distinction and the amount

realized whether the liability is being

assumed or taking subject to assume just

means that taxpayer two would be the

party on the actual hundred thousand

dollar mortgage take subject two means

taxpayer one is on the mortgage still

named in the mortgage but taxpayer two

continues to pay so if taxpayer two two

does not pay anymore and defaults then

the bank will come after tax payer one

but taxpayer one can still go after

taxpayer two now this rule also applies

regardless of the liability is recourse

or non recourse in nature and this has

been through the crane and Tufts

decisions both Supreme Court level

decisions in tax law recourse liability

means the borrower is personally liable

beyond just the amount at risk or the

actual investment non-recourse the

borrower is not personally liable it's

just the amount of investment and

secured collateral whatever it is so if

you have this hundred thousand dollar

mortgage on a house and it's

non-recourse which no recourse

liabilities these days are very rare few

hundred thousand dollars non-recourse

liability you would almost surely have

some type of asset collateral attached

to that and that would probably be the

actual house so if the party did not

make any more payments in a non-recourse

liability the bank could not go after

the party but they could seize the house

they can sell the house and take what

they are owed and then give the rest to

the party recourse in that case if

someone stopped paying the liability the

bank can go after the actual personal

assets not just the investment or

whatever it is

so that's constructive cash that's a

huge concept when it comes to amount

realized now the next is the fair market

value of non-cash property received you

might be thinking okay I know exactly

what that is it's whatever the willing

buyer willing seller said it nice

with the tax law defines whatever the

willing buyer willing seller agree to

that but what if it's very hard to

determine the fair market value and the

parties don't agree well there was a

case known as Philadelphia Park and

amusement Philadelphia Park and

amusement company will they say

Philadelphia Park and amusement and this

is the most relied upon case when it

comes to this concept if you can't

determine the fair market value of a

specific item and you're trying to

calculate the amount realize look at the

other side if the parties are unrelated

so if we have tax payer one and tax

payer two and you're looking at both

their amount realized both their amount

realize should be equal their amount

realized should equal so if you're able

to determine the amount realized of one

party it should equal the other party as

well if the parties are unrelated

related being if your family members

corporation two shareholder

employee-employer but if your unrelated

parties then they should equal the

amount realized should equal so that's

one important thing so if you know the

fair market value if the non-cash

probably received then you include that

but if you don't use the Philadelphia

Parking amusement concept to calculate

what that amount realized should be if

you know the other sized amount realized

what the value of the property given up

is so for example if we didn't know the

value of this house but we knew the

mortgage is a hundred thousand dollars

and we knew that there's five hundred

thousand dollars of cash being provided

we can use the Philadelphia Parking

amusement to make the amount realize for

party two also equal to six ninety

thousand dollars and again that's

assuming they're unrelated so the last

item that goes into amount realized is

selling expense so selling expense

includes various items such as if you're

selling the house right taxpayer one

selling a house and capture one incurs

various legal fees and setting up the

contract or realtor fees or various

items to actually sell the asset to get

it sold

those are going to be subtracted that's

the only one subtracted

so these are subtracted a way to

calculate amount realize so these are

the items that go into amount realized