Definition
The total profit from a property sale calculated as sale proceeds minus the tax basis (original cost plus improvements minus depreciation taken), whether or not the gain is recognized (taxed) in the current year.
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Realized gain is the economic gain from selling property. If you buy for $200,000, spend $50,000 on improvements, take $20,000 in depreciation deductions, and sell for $300,000, your basis is $230,000 ($200k + $50k - $20k), and your realized gain is $70,000. Realized gain exists whether or not it's recognized (taxed). In a 1031 exchange, gain is realized but not recognized—it's deferred. In a principal residence sale, some realized gain might not be recognized due to the exclusion. Understanding realized gain is crucial for understanding your true economic position. A small realized gain might result in no tax if you qualify for exclusions; a large realized gain triggers significant tax even if you defer recognition through a 1031 exchange (because the basis carries forward, so you'll recognize it later). Realized gain is calculated before any adjustments or exclusions. Investment property losses work similarly—realized loss is economic loss, while recognized loss is the portion deductible for tax purposes.
Pro Tip
Calculate your realized gain before deciding on sale strategy. A large realized gain might warrant a 1031 exchange or strategic deferral to spread the tax burden.
Example
An investor buys property for $200,000, sells it for $300,000, and the basis (after depreciation) is $180,000. The realized gain is $120,000, which might be recognized immediately, deferred via 1031 exchange, or partially excluded via other provisions.