Question

Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $535,000. 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 $902,500.

a.) What amount of gain on the sale of the home are the Pratts required to include in taxable income?

b.) Assume the original facts, except that Steve and Stephanie live in the home until January 1 of year 3, when they purchase a new home and rent out the original home. They finally sell the original home on June 30 of year 5 for $902,500. Ignoring any issues relating to depreciation taken on the home while it is being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?

c.) Assume the same facts as in part (b), except that the Pratts live in the home until January of year 4, when they purchase a new home and rent out the first home. What amount of realized gain on the sale of the home will the Pratts include in taxable income if they sell the first home on June 30 of year 5 for $902,500?

d.)

Assume the original facts, except that Stephanie moves in with Steve on March 1 of year 3 and the couple is married on March 1 of year 4. Under state law, the couple jointly owns Steve’s home beginning on the date they are married. On December 1 of year 3, Stephanie sells her home that she lived in before she moved in with Steve. She excludes the entire $117,500 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?

Answer 1

Answer :-

a). $0. They are allowed to exclude the entries realized gain.Since the Pratt's owned & used the Spokane home for at least 2 years during the 5-year period ending on the date of sale,they qualify for the gain exclusion.

b). $367,000 gain recognized. Amount realized from the sale $902,000 Adjusted basis $35,000 Gain realized $367,000 Exclusion 0 Gain recognized $367,000 Steve must recognize all of the realized gain because he does not meet the use test.

c).$0.117,500 gain recognized. They realized a $367,000 gain on the sale However the couple qualifies for the married filing joint exclusion of $500,000 because Steve meets the ownership test & Steve and Stephanie meet the principal use test.Consequently,they can exclude the entire gain.

d).$117,500 gain recognized. The couple realizes a gain of $300,000.Both Steve & Stephanie meet the ownership & use test.However, because Stephanie used the exclusion from her home sale during the two years prior to the sale of the Pratt's home in year 5,they may exclude only $249,500 of the $367,000 gain.