Walter, a single taxpayer, sells a house that he owns on June 1, 2016 for $500.0
ID: 3167487 • Letter: W
Question
Walter, a single taxpayer, sells a house that he owns on June 1, 2016 for $500.000 . He purchased the house on January 1, 2008, for $200,000 and used the house as his personal residence until May 31, 2015. He allowed a friend to live in the house from June 1, 2015 til May 31, 2016. Unfortunately, a spat with the friend ended the "rent free" arrangement . Th house had an adjusted basis at the date of sale of $200.000. Walter used the sales proceeds to purchase a new house at a cost of $450,000.
a. How much gain is recognized by Walter on the sale of the house.
B. What is the basis of the new house purchased by Walter?
Explanation / Answer
a) Realised Gain = (Proceeds from Sale) - (Adjusted Basis)
= (500,000) - (200,000) = $300,000
b) Cost Basis of new house = (Purchase Cost)
= $450,000
Please Note: Gain you posed from the sale of a previous home may be deducted from the Basis, if the house was sold before May 7, 1997. In that case the adjusted basis will be as shown below:
Cost Basis of new house = (Purchase Cost) - (Gain from previous sale)
= 450,000 - 300,000 = $150, 000
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