Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $542,500.
ID: 2482392 • Letter: S
Question
Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $542,500. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $942,500.
A. Assume the original facts, except that Steve and Stephanie lived in the home until January 1 of year 3 when they purchased a new home and rented out the original home. They finally sell the original home on June 30 of year 5 for $942,500. Ignoring any issues relating to depreciation taken on the home while it was being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?
Recognized Gain:
B. Assume the original facts, except that Stephanie moved in with Steve on March 1 of year 3 and the couple was married on March 1 of year 4. Under state law, the couple jointly owned Steve’s home beginning on the date they were married. On December 1 of year 3, Stephanie sold her home that she lived in before she moved in with Steve. She excluded the entire $150,000 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?
Recognized Gain:
Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $542,500. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $942,500.
A. Assume the original facts, except that Steve and Stephanie lived in the home until January 1 of year 3 when they purchased a new home and rented out the original home. They finally sell the original home on June 30 of year 5 for $942,500. Ignoring any issues relating to depreciation taken on the home while it was being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?
Recognized Gain:
Explanation / Answer
Answer
A. Steve and Stephanie lived in the original home as primary residence for less than 2 years(Feb 1 of year 1 to Jan 1 of year 3) and thier reason of leaving was not due to unusual circumstances so they do not qualify for exclusion and all realized gain will included in Taxable Income.
Recognized Gain= 942500 - 542500 = $400000
B. Steve meets the ownership and use test but Stephanie does not (even though she meets the use test) because she sold her own home on December 1, year 3 and excluded the entire gain on the sale of her home. She is not eligible to claim another exclusion for two years after December 1, year 3. Consequently, Steve qualifies for the $250,000 exclusion (not the $500,000 exclusion because Stephanie does not qualify). Steve (and Stephanie) must recognize $(400000-250000)150,000 of the $400,000 gain.
Recognized Gain: $150000.
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