a. What is Gain? and Loss?

Do you know what a Gain is?

Do you know what a Loss is?

You should.

Let’s review these basic, but key terms…..

Gain is your “profit” on the sale of an asset. Gain is NOT the sales proceeds.

Gain is calculated as follows:

• Gross Proceeds LESS selling Expenses LESS net original investment= Gain or Loss

For example…I sold my brother a vacant lot for $10,000. I paid $2,000 for this lot several years ago.

What are the gross proceeds???…..$10k

What is my Basis?????…..$2k

What is the gain? Or Loss?…..Gain = $8k

YOU MUST know this term: BASIS. This is your “net investment” in an asset. For instance , your basis in your home is your original purchase price, plus any other improvement related costs you incurred since bought the house.

What is Loss? A loss is what happens when the above “gain” formula results in a negative number. A loss happens when you do not recoup your full investment on the sale of an asset. For example, if you sell your home for less than you paid for it, then you have a loss.

Using the above example, let’s say instead i sold the vacant lot to a stranger for $500. In this situation, I will have a $1,500 loss on my vacant lot investment. ($500 proceeds less $1500 basis).

Here are some links to help you become familiar with calculating gains and losses.

http://www.irs.gov/pub/irs-pdf/p544.pdf  How to Calculate Gain / Loss

http://www.irs.gov/pub/irs-pdf/p551.pdf  How to track Basis

Please post some sample gain / loss scenarios to help yourself understand.