A Realized Gain refers to the difference between the sale price of a relinquished property and its adjusted basis. The 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows property owners to defer recognition of capital gains taxes if they exchange one investment property for another “like-kind” property.
To put it simply:
Realized Gain = Sale Price of Relinquished Property − Adjusted Basis of Relinquished Property
However, it’s essential to note that Realized Gain doesn’t necessarily mean a tax will be immediately due. If a taxpayer successfully completes a 1031 exchange, the gain can be deferred, and taxes might not need to be paid until the replacement property is sold in a taxable transaction.
The adjusted basis of a property usually starts as the original purchase price and can be adjusted for factors like improvements made to the property, depreciation taken during the ownership, and costs associated with the sale or purchase of the property.
If a taxpayer does not reinvest all the proceeds from the sale, or if they receive “boot” (which can be in the form of cash, debt relief, or other non-like-kind property), they might have to recognize and pay taxes on some or all of the realized gain.