Question

1. For the past ten years, the Martins lived in a townhouse in Long Island with an adjacent empty lot. In January of the current 2020, Mr. Martin opened three laundromats and moved the family to Manhattan. The purchaser of their residence did not wish to own the empty lot and only bought the townhouse. However, in late August, they sold the vacant lot to another individual for $300,000. The house and the lot were never used by the Martins in a trade or business or held for investment. The realized gains resulting from the two sales are computed as follows:

	Townhouse	Vacant Lot
	January Sale	August Sale
Selling price	$540,000	$300,000
Minus: Selling expenses	(12,000)	(9,000)
Amount realized	$528,000	$291,000
Minus: Basis (original purchase price)	(252,000)	(48,000)
Realized gain	$276,000	$243,000

As a result of the sales described above, what is the amount of realized gain that must be recognized during the current year?

Answer 1

Facts from the question:

1. Martins lived in the house for Ten years and used as principal residence and both townhouse and adjacent vacant land is owned by them. This satisfies the conditions under section 121 of principal residence, living for atleast two years out of 5 preceding years and ownership.

2. Dwelling unit is sold in January and vacant lot is sold in August.

3. Both places have not been used for other purposes other than living.

4. Sale of vacant land can be cosidered as part of residential property sale as dwelling unit is sold within or after 2 years from the date of sale of vacant land.

Assumptions:

1. Martins filing their returns jointly.

2. Adjacent vacant land is used by Martins as part of their residence.

3. Lookback requirements of 2 years is met, It means no home was sold in 2 previous years.

As all required conditions are met, we can determine the amount of gain reported after exclusion.

Both sales can be considered as one transaction of sale of principal home.

Gain From Townhouse sale $276,000

Gain From Vacant lot sale $243,000

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Total Gain 519,000

Exclusion in terms of S.21 500,000

(Maximum $500,000 in case

of Joint Returnees)

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Recognised Gain $19,000

Note: If Martins are filing returns separately, exclusion is limited to $ 250,000 to the owner returnee of the property and remaining $269,000 to be recognised as gain.