Question

Missy, age 30, has owned her principal residence (adjusted basis of $225,000) for five years. During the first three years of ownership, she occupied it as her principal residence. During the past two years, she was in graduate school and rented the residence. After graduate school, Missy returned to the same location where she previously worked. At this point, she purchased another residence for $400,000 and listed her old residence for sale at $340,000. Due to a slow real estate market, 11 months later Missy finally receives an offer of $330,000.

1. What is Missy’s recognized gain if she immediately accepts the $330,000 offer (i.e., 11 months after the listing date)? Selling expenses are $20,000.
2. What is Missy’s recognized gain if she rejects the $330,000 offer and accepts another offer of $340,000 three months later (i.e., 14 months after the listing date)?
3. Advise Missy on which offer she should accept (assume that she is in the 24% tax bracket).

explain the answer.

Answer 1

YEAR	OWNERSHIP	RESIDENCE
1	Yes	Yes
2	Yes	Yes
3	Yes	Yes
4	Yes	-
5	Yes	-
6	Yes	-
7	Not Applicable	Not Applicable

In this case both condition satisfied hence Missy will be eligible for maximum exclusion of gain up to $250,000

Case 1: $340,000 after 14 months of listing table

YEAR	OWNERSHIP	RESIDENCE
1	Yes	Yes
2	Yes	Yes
3	Yes	Yes
4	Yes	-
5	Yes	-
6	Yes	-
7	Yes	-

In this case Missy does not qualify the second condition.Home is not used as main residence for at least 24 months out of last 5 years up to the date of sale Hence no exclusion available and all gain taxable in this case

(A) and (b)

Calculation of gain:

Particular	selling price $330,000	Selling Price $340,000
sale price	330,000	340,000
Less- Selling Expense	20,000	20,000
Amount Realised	310,000	320,000
Less- Adjusted Basis	225,000	225,000
Gain	85,000	95,000
Less : Exclusion	85,000
Taxable Gain	0	95,000
Tax on Gain	0	26,600
Net Gain Realised after tax	85,000	68,400

(C)  

Hence Missy should accept $330,000