Recognized loss definition
/What is a Recognized Loss?
A recognized loss occurs when an asset is sold for an amount less than its purchase price. This situation most commonly arises when an entity sells either a security or property. Depending on the nature of the asset and the circumstances of the sale, a recognized loss may qualify for capital gains treatment, which means that the loss can be deducted from any capital gains reported for tax purposes. Capital gains treatment is usually available if the underlying asset was retained for at least one year.
Recognized losses can be incorporated into tax planning. For example, when a taxpayer has a recognized capital gain of $10,000, it can make sense to recognize a $4,000 loss on a different investment, in order to reduce the capital gain for tax purposes.
Example of a Recognized Loss
Alyssa purchased a rental property several years ago as an investment, paying $400,000 for it. Because of changes in the zoning laws near this property, its value has declined to $380,000. Her unrecognized loss at this point is $20,000. A few months later, she finds a buyer who is willing to pay $370,000 for the property. She agrees to the deal, and incurs a recognized loss of $30,000 on the property. She can report this $30,000 loss on her tax return for the year in which the sale occurred.