Final answer:
Pam would have a realized loss of $10,000 when selling, exchanging, or receiving insurance proceeds for the boat at $35,000, since the adjusted basis is $45,000. If the boat were sold for $48,000, the realized and recognized gain would be $3,000.
Step-by-step explanation:
When dealing with the sale or disposition of assets, it is important to determine the realized gain or loss and the recognized gain or loss. These figures help understand the tax implications of the transaction.
For the sale of the boat:
- Realized gain or loss is calculated by subtracting the asset's adjusted basis from the amount realized (selling price). In Pam's case, if she sells the boat for $35,000, her realized loss would be $45,000 (adjusted basis) - $35,000 (selling price) = $10,000.
- Recognized gain or loss is the amount of the realized gain or loss that is subject to tax. In most cases, the recognized gain or loss is the same as the realized gain or loss unless there is a non-recognition provision that applies.
For an exchange of a boat for another boat of equal value, the tax code may provide for non-recognition of any gain or loss (i.e., tax deferral).
In the event of theft, when Pam receives insurance proceeds of $35,000 for a boat with an adjusted basis of $45,000, she would have a realized loss of $10,000, similar to selling the boat for the insurance proceeds amount.
If the fair market value and selling price were $48,000 instead, the realized gain would be $48,000 (selling price) - $45,000 (adjusted basis) = $3,000, and the recognized gain would likely also be $3,000, subject to any relevant tax provisions.