Gain is an important concept in a 1031 exchange. But what many taxpayers aren’t aware of is that there are various different types of gain. Most importantly, there is a big distinction between realized gain and recognized gain. In this article, we are going to talk about the difference between recognized gain and realized gain in a like-kind exchange.
Recognized gain is the taxable portion of your realized gain. When you’re selling a piece of property in a traditional sale, your recognized gain and realized gain are often the same. This is not true in 1031 exchange transactions, because a 1031 allows you to defer your capital gains tax liability. As a result, it’s very important to distinguish between recognized gain and realized gain so you know exactly what you’re dealing with as you move forward with the sale of a property.
When a taxpayer sells a piece of property, the benefit they receive is their realized gain. Your realized gain is the same whether you’re selling a piece of property outright, or in a 1031 exchange. To calculate your realized gain, take the property sale price and subtract your closing costs, as well as your adjusted tax basis.
Contact a 1031 Intermediary
The first step in any 1031 exchange is to contact a qualified intermediary to discuss your options. An intermediary can examine your situation and advise you on the best way to move forward. At Commercial Partners Exchange Company, our qualified intermediaries have more than two decades of experience helping taxpayers through their 1031 exchanges. We’ll help you put together your 1031 exchange documents and advise you on replacement properties. Contact us today at our office (located in downtown Minneapolis) to get started with your 1031 exchange!