Just because the stock you own went through the roof doesn't mean you're going to have a huge tax bill at the end of the year. See, the Internal Revenue Service doesn't tax on gains until you sell the stock and realize the gain. The term "recognized gains" takes it a step farther because it reduces the gain by any pertinent tax exclusions. Knowing how to figure your recognized gain makes sure you don't pay more in taxes than required.
Add the cost of acquiring the property to the amount you paid to figure your basis. For example, if you bought stock for $2,000 and you paid a commission of $50, your basis for the stock is $2,050. Alternatively, if you bought your house for $140,000 and paid $1,000 in legal and recording fees, your basis is $141,000.
Subtract the cost of selling the property from the proceeds to figure the net proceeds. In the first example, if you sell the stock for $2,550 but it costs you another $50 commission, your net proceeds are $2,500. In the second example, if you sell the home for $190,000 but you pay your broker $5,000, your net proceeds total $185,000.
Subtract your basis from your proceeds to figure your realized gain on the sale of the property. Continuing the stock example, subtract your basis of $2,050 from your proceeds of $2,500 to get a realized gain of $450. In the home example, subtract your basis of $141,000 from your proceeds of $185,000 to get a realized gain of $44,000.
Subtract any exclusion your gain is eligible for from your realized gain to figure your recognized gain. Unless there is an exception that excludes some of your gain from taxes, your recognized gain equals your realized gain. For example, your $450 realized gain on your stock would also be your recognized. However, if you qualify for the primary residence sale exclusion, which allows you to exclude up to $250,000 of gain when you sell your primary residence, your $44,000 realized gain would be reduced to a $0 recognized gain.
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