Gains on the Disposition of Property
1. On the sale or exchange of appreciated property, gain is determined by comparing the adjusted basis (A/B) of the property transferred and the amount realized (A/R) by the taxpayer on the disposition.
2. A gain is realized to the extent the amount realized exceeds the adjusted basis.
i. Gain = A/R – A/B
b. Amount Realized
i. 1001(b) defines the amount realized as the sum of money received, plus the FMV of any property received.  Whether the transferor receives cash, property, or services, a benefit has been realized, and this benefit is measured by the value of any cash, property, or services received.  T/f the A/R represents the total economic benefit received in exchange for the property transferred.
ii. Because economic benefit accrues whenever the tranferee cancels or assumes the transferor’s indebtedness or acquires the property subject to a debt, the A/R includes the amount of the debt cancelled or assumed.
iii. Generally, it makes no difference  whether the seller is personally liable for the debt or whether the debt is related to the property.
iv. the seller is relieved of an obligation ad the amount of debt relief is included as an amount realized
c. Adjusted Basis
i. Adjusted basis is not relevant in determining GI earned from the rendition of services.  This is because in property dispositions, the A/B concept results in a tax-free return of capital.
ii. As a broad generalization, A/B represents the taxpayer’s investment in the property.
iii. On the purchase of property, cost includes cash, FMV of other property transferred or services rendered in exchange for the property received, plus, certain acquisition expenses (brokers or attorney’s fees).
iv. Basis depends upon the manner in which the property was acquired.
v. Basis must be adjusted for certain subsequent events.
1. I.e. depreciation deductions decrease basis (1016(a)(2))
2. I.e. capital improvements to the property increase basis (1016(a)(1)) p. 100
vi. Depreciation deductions are allowed on business or investment property because the taxpayer is denied a current deduction for the cost of the asset but should be entitled to recover the asset’s cost (the taxpayer’s capital) as the asset is used in the business or investment activity.