Figures: tax year 2026
A disposition calculation answers three separate questions: how much economic gain or loss occurred, how much enters the current return, and what tax character applies. Supporting documentation establishes the consideration, adjusted basis, ownership, asset use and relevant dates.
Amount realized generally includes cash, the fair market value of other consideration and liabilities discharged through the transfer, reduced by selling expenses. Debt relief can therefore produce gain even when the seller receives little cash.
Adjusted basis generally begins with acquisition cost, including capitalized acquisition expenses. Capital improvements increase basis, while depreciation allowed or allowable reduces basis. Supporting documentation must reconcile tax depreciation through the disposition date, rather than substituting accumulated book depreciation.
The basic relationships are:
- Realized gain or loss equals amount realized minus adjusted basis.
- Recognized gain or loss is the portion included under the applicable recognition rules.
- Character determines whether the recognized amount receives ordinary treatment, capital treatment or annual business-property netting.
A purchase financed with debt generally includes the financed acquisition cost in basis. Repayment of acquisition debt does not independently reduce basis, and mortgage principal paid at closing is not...
Common mistakes
- Netting before recapture. In Example 1, treating the full $225,000 disposition total as business-pool gain leaves the $75,000 equipment recapture inside the wrong category.
- Recapturing every depreciation dollar. The lathe recognizes only $15,000 gain; reporting $50,000 recapture exceeds the gain available from that sale.
- Using all historical losses. Subtracting the original $35,000 prior losses in Example 1 counts $10,000 already recaptured and understates surviving capital gain by $10,000.
Bottom line
- Amount realized includes relevant debt relief and subtracts selling expenses; adjusted basis reflects required tax-basis adjustments.
- Asset use, holding period, taxpayer type and recognition restrictions determine the amount and character entering the return.
- Ordinary depreciation recapture is removed before annual business-property netting; a net business-property loss receives ordinary treatment.
- The five-year lookback converts net business-property gain to ordinary income only to the extent of eligible prior losses not already recaptured.
Exam shortcut
Start with asset use, ownership, holding period and taxpayer type. Circle facts about personal use, original issuance, related ownership, replacement purchases and payments after the sale year. Build one row per asset before netting. Keep ordinary recapture outside the business pool, then inspect the five preceding years before assigning capital treatment. For installments, write adjusted basis, selling expenses and immediate recapture together before testing assumed debt.
The full lesson (about 8,989 words, 60 min read) adds 13 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.B1
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