Recognized gain definition
/What is a Recognized Gain?
A recognized gain occurs when an asset is sold for an amount greater than its purchase price. It is calculated as the sale price of an asset, minus the purchase cost of the asset. This situation most commonly arises when an entity sells either a security or property. Depending on the nature of the asset and the circumstances of the sale, a recognized gain may qualify for capital gains treatment, which means that the income tax rate paid is significantly reduced. Capital gains treatment is usually available if the underlying asset was retained for at least one year.
How to Calculate a Recognized Gain
Morton purchased rental property several years ago for $600,000. Over time, improvements in the surrounding area have increased the value of this property, to the point where it is now worth $750,000. This is an unrecognized gain, since Morton still owns the property. In the next year, Morton receives an offer to sell the property for $1,000,000, which he accepts. This results in a $400,000 recognized gain in the year in which the sale occurred.