Taylor has owned and occupied her personal residence (adjusted basis of $190,000
ID: 2479189 • Letter: T
Question
Taylor has owned and occupied her personal residence (adjusted basis of $190,000) for four years. In April 2015, she sells the residence for S300,000 (selling expenses are $20,000). On the same day as the sale, Taylor purchases another house for $350,000. Because of noisy neighbors, she sells the new house after just 10 months. The selling price is $483,000 (selling expenses are $18,000). a. What is Taylor's recognized gain on the sale of the first residence? b. What is Taylor's basis for her second residence? c. What is Taylor's recognized gain on the sale of the second residence? d. Assume instead that the sale of the second residence was due to Taylor's job transfer to another state. What is her recognized gain on the sale of the second residence?
Explanation / Answer
a)What is Taylor’s recognized gain on the sale of the first residence?
Realized gain is $300,000 (selling price) - $190,000(adjusted basis) - $20,000(selling expenses) = $90,000.
No gain is recognized on that sale.
See IRS publication 523 - www.irs.gov/pub/irs-pdf/p523.pdf
You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.
You meet the ownership test.
You meet the use test.
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
b)What is Taylor’s basis for her second residence?
That is her purchase price $350,000
c)What is Taylor’s recognized gain on the sale of the second residence?
Taylor’s realized gain is $483,000 (selling price) - $350,000(adjusted basis) - $18,000(selling expenses) = $115,000.
Because Taylor doesn't qualify for section 121 exclusion mentioned above - the full amount of $115,000 would be her recognized gain.
d)Assume instead that the sale of the second residence was due to Taylor’s job transfer to another state. What is her recognized gain on the sale of the second residence?
In this case her maximum exclusion would be $250,000 * 10 month / 24 months = $104,000 - that amount may be excluded.
and her recognized gain would be $115,000 - $104,000 = $11,000.
See in the same publication - Reduced Maximum Exclusion
If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:
Fail to meet the ownership and use tests, orHave used the exclusion within 2 years of selling their current home.
In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
A. change in place of employment.
B.Health.
C.Unforeseen circumstances.
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