Amount Recognized

"Amount recognized" refers to income you receive or losses you might want to deduct that need to be reported on your tax return. Recognizing income isn't about, um. illegally looking the other way...it's about what income is taxable or has impact on whatever calculation you're making.

When calculating the amount recognized when you sell a house, for example, you don't just list the straight profit from the sale. To calculate the amount recognized for what you would owe for tax purposes, you would take the sale price, subtract your selling costs (such as the broker fee), then subtract the original price you paid for the house. You also subtract the value of any improvements you made.

Or let’s say you bought a valuable piece of art by Andy Warhol for $100,000 (think: a napkin smudge). It was rather dirty so you paid someone $5,000 to clean it up. You then paid a broker $3,000 in commission to sell it at an auction for $200,000. To get the amount recognized for tax purposes, you would subtract the $3,000 from the sale price of $200,000 to equal $197,000. Then subtract the $100,000 you originally paid for it less the $5,000 cleaning fee to get $92,000, the “amount recognized” for your tax return.