Introduction

Buying, selling, or exchanging property—whether it is a personal residence, a business asset, or an investment—can significantly affect an individual’s wealth. This module shifts focus from the taxation of recurring income to the taxation of property transactions, emphasizing how changes in asset ownership and value impact an individual’s tax liability. The core objective is to understand how an individual’s tax liability is affected when assets are acquired or disposed of under various circumstances.

Property is a very broad term encompassing virtually everything that can be owned or possessed and has value. Its key characteristics include ownership, where a recognized owner holds rights and control over the asset; value, as the property must possess some economic worth, which often serves as the basis for taxation; and transferability, which is the ability to convey ownership, a critical feature in the context of sales, gifts, and estates.

For tax purposes, a property transaction includes any event in which a taxpayer acquires or disposes of an asset. Acquisition can occur through purchase, gift, inheritance, or exchange for services, and the method of acquisition establishes the asset’s initial basis. Disposition, on the other hand, refers to any event that transfers ownership of an asset, such as a sale, exchange, involuntary conversion, or gift. Each disposition event may trigger a taxable gain or loss depending on the amount received and the asset’s adjusted basis at that time.

Not all gain or loss on property disposition is taxed in the same way. Property classification is important because the tax treatment of gains and losses varies by type. For example, gains from selling capital assets like stocks or personal real estate may qualify for preferential capital gains tax rates, while gains from selling ordinary income property such as inventory are taxed at regular income rates. Similarly, certain losses on personal-use property may not be deductible, while losses on business or investment property often are.

This module is structured to cover the taxation of property transactions in a logical sequence, with each topic building upon the last. The module begins with the foundational concept of basis, which represents a taxpayer’s investment in an asset and serves as the starting point for all subsequent calculations. Building upon this, the module examines cost recovery mechanisms, such as depreciation and amortization, which systematically reduce the asset’s basis over time to arrive at its adjusted basis. This adjusted basis is then used to calculate gain or loss on disposition, which is the core subject of the module, determined by the difference between the amount realized from a transaction and the property’s adjusted basis. The discussion then moves to specialized rules for nontaxable dispositions, such as like-kind exchanges, which allow for the deferral of gain recognition under specific conditions. Finally, the module concludes by explaining the rules for netting gains and losses from various transactions and the associated reporting requirements.