What is a Realized Gain?

Realized Gain

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Realized Gain

A realized gain refers to the profit that results from selling an asset or investment for a price higher than the original purchase price (or cost basis). This gain is “realized” because the asset has been sold, and the gain has been effectively locked in, as opposed to an “unrealized gain,” where the asset’s value has increased on paper, but the asset has not been sold.

It’s important to note that realized gains are usually subject to taxation, depending on the jurisdiction and the specific tax laws related to capital gains. The tax rate might differ based on how long the asset was held before it was sold (short-term vs. long-term gain).

Formula for Realized Gain:
Realized Gain = Selling Price − Original Purchase Price (or Cost Basis)

Example of a Realized Gain

Let’s delve into a practical example to illustrate the concept of a realized gain in a real estate context.

Example: Real Estate Transaction

Scenario: Maria purchased a home in 2010 for her family. As the years passed, the neighborhood became more developed and desirable, leading to an appreciation in the value of her property.

  • Original Purchase: In 2010, Maria bought the house for $200,000.
  • Expenses: Over the years, she made improvements on the house, which cost her a total of $50,000. This increases her cost basis in the property.
    New Cost Basis = Original Purchase Price + Improvements
    = $200,000 + $50,000
    = $250,000
  • Sale: In 2023, seeing the potential profit due to the appreciation in her property’s value, Maria decided to sell the house. She successfully sold it for $400,000.
  • Determine the Realized Gain:
    Realized Gain = Selling Price – Cost Basis
    = $400,000 (selling price) – $250,000 (cost basis)
    = $150,000

In this example, Maria has a realized gain of $150,000 from the sale of her house. This gain reflects the difference between her total investment (original cost + improvements) and the selling price.

However, depending on the jurisdiction, certain exclusions or deductions might apply to the realized gain from the sale of a primary residence, potentially reducing the amount of tax Maria owes. She would need to consult with a tax professional to understand any potential tax implications fully.

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