Question

Steve Pratt, who is single, purchased a home in Spokane, Washington, for $400,000. He moved into the home on February 1 of year 1. He lived in the home as his primary residence until June 30 of year 5, when he sold the home for $725,000. (Leave no answer blank. Enter zero if applicable.)

a. What amount of gain will Steve be required to recognize on the sale of the home?

Answer 1

Gain to be recognized on sale of the Home = $75,000

Explanation:

In case of single return, If you owned and live in the primary residence for two of the five years before the sale, then up to $250,000 of profit is tax-free.

To claim the deduction of $250,000 on the gains on sale of home, the three tests to be fulfilled are:

1. Ownership: You must have owned the home for at least 2 years during the 5 years prior to sale of the home.
2. Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
3. Timings: You have not excluded the gain on the sale of another house within 2 years prior to the sale of the primary residence.

In the present scenario, all the conditions are satisfied and Steve Pratt is eligible for a deduction of $250,000 from the gains of selling the the house.

Gain from selling the home = $725,000 - $400,000 i.e. $325,000

Deduction : $250,000

Recognized gain = $325,000 - $250,000 i.e. $75,000