Talk to an Advisor

Recognized Gain

In the context of U.S. tax law and specifically in relation to a 1031 exchange, recognized gain refers to the amount of gain that is subject to taxation.

Here’s a more detailed breakdown:

  1. 1031 Exchange: A 1031 exchange, also known as a like-kind exchange, allows an individual or business to exchange one investment property for another without recognizing any potential capital gains in the immediate term. Instead, the tax on the gain is deferred until the replacement property is sold, assuming no subsequent 1031 exchanges are made.
  2. Realized Gain: This is the difference between the selling price of the property being relinquished and its adjusted basis (which is typically the original purchase price plus improvements, minus depreciation). If the selling price is higher than the adjusted basis, then a gain has been “realized.”
  3. Recognized Gain: While the realized gain is the actual profit you made from the sale, the recognized gain is the amount you must report and pay taxes on. In a regular sale (without a 1031 exchange), the realized and recognized gains would be the same. However, in a successful 1031 exchange, the recognized gain would be zero because you are deferring the tax.

Not all gains can be deferred using a 1031 exchange. If you receive other value or “boot” in addition to like-kind property in the exchange (such as cash or property that’s not of a like-kind), part of the gain may need to be recognized.

For instance, if you sell a property for $400,000 that you originally purchased for $300,000, you’ve realized a gain of $100,000. If you then use all of that $400,000 to purchase another like-kind property in a 1031 exchange, you would recognize no gain, and thus owe no taxes at that time. However, if you only used $350,000 to purchase a new property and took $50,000 in cash, that $50,000 could be subject to taxes as “boot”, and thus you’d have a recognized gain of $50,000.

It’s essential to work with a tax professional when engaging in 1031 exchanges to ensure all rules are followed, and tax implications are understood.