The Calculation of Recognized Gain or Loss and Classification of Transactions

In 2018, Sergio bought a house for $200,000 as an investment, with the intention of owning it for a while and then selling it.

Sergio owns another house which is his main residence. In 2022, Sergio sold the investment house for $180,000. Let's determine the following:

The amount of realized gain or loss:

To determine the amount of realized gain or loss, we need to subtract the selling price from the purchase price.

Purchase price: $200,000

Selling price: $180,000

Realized gain or loss = Selling price - Purchase price

Realized gain or loss = $180,000 - $200,000

Realized gain or loss = -$20,000

The amount of realized gain or loss is -$20,000, indicating a loss of $20,000.

How this transaction is classified, ordinary or capital:

Since Sergio bought the house as an investment and not for personal use, the transaction is classified as a capital transaction.

The amount of recognized gain or loss:

We can determine the amount of recognized gain or loss. Recognized gain or loss refers to the portion of the realized gain or loss that is taxable. In this case, the recognized loss would be equal to the realized loss since a loss is always recognized in full. Therefore, the amount of recognized gain or loss is also -$20,000.

To summarize:

• The amount of realized gain or loss is -$20,000.
• This transaction is classified as a capital transaction.
• The amount of recognized gain or loss is -$20,000.

Questions:

1. What was the amount of realized gain or loss in Sergio's transaction?

2. How is this transaction classified?

3. What was the amount of recognized gain or loss?

Answers:

1. The amount of realized gain or loss was -$20,000, indicating a loss of $20,000.

2. This transaction is classified as a capital transaction.

3. The amount of recognized gain or loss was also -$20,000.