Question

2.         Kitty, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000.

a.         What is Kitty’s recognized gain/loss, if any, on the sale of her old principal residence?

  

b.        What is Kitty’s basis in her new principal residence?

Answer 1

Solution: This transaction is covered under sec. 1034.

Sec. 1034 is a non-recognition provision which involves the replacement of a principal residence ("old residence") with another principal residence ("new residence"). If Sec. 1034 applies, the taxpayer rolls over the gain from the sale of the old residence into a new residence. Means Non-recognition provisions defer the recognition of gain, making the present transaction non-taxable, but preserving the gain until the property received is disposed of in a subsequent taxable transaction. Thus,

a. Kitty's recognized gain/loss = Adjusted sale price - cost of new residence

= ($375,000-22) - $200,000 = $153,000

b. Kitty's basis in her new principal residence = Cost of new residence - (gain realized but not recognized - gain recognized)

= $200,000 - (amount realized - adjusted basis- 153,000)

= $200,000 - ($375k-22k - $64,000 -153,000)

= $200,000 - $136,000

Kitty's basis = $64,000