Introduction

This module examines how federal income tax law treats the acquisition, ownership, and disposition of property. Buying, selling, exchanging, or otherwise transferring property alters a taxpayer’s economic position and, in many cases, creates taxable events. The primary objective of this unit is to explain the concepts and calculations that determine whether a disposition produces taxable gain or deductible loss and how those items are characterized for tax purposes.

A few foundational concepts underlie the tax treatment of property transactions. First, a taxpayer’s tax basis in property represents the starting point for measuring gain or loss. Basis generally equals the taxpayer’s cost, increased or decreased by later adjustments such as improvements, depreciation, and certain other items. Second, the amount realized on a disposition is the total consideration received, reduced by selling costs. Third, recognized gain or loss is the difference between the amount realized and the property’s adjusted basis, subject to statutory exceptions that defer, exclude, or recharacterize recognition. Finally, whether a gain or loss is classified as capital or ordinary depends on the property’s character and the taxpayer’s activity, which in turn influences the applicable tax rates and deductibility rules.

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, as well as the associated reporting requirements.