Question

Angela, who is a single individual, rented an apartment on 72nd Street in New York City ("the apartment") on January 1 of Year 1. This was the only residence in which she lived.  Two years later (January 1 of year 3) Angela purchased the same apartment from the owner for $1,200,00.  6 months later (July 1 of Year 3) Angela was told by her physician that she should move out of New York City permanently due to an underlying raspatory medical condition which made the New York City air quality and population density particularly dangerous for Angela.  As a result, Angela put her apartment on the market and moved immediately to Arizona.  The apartment sold on January 1 of Year 4 for $1,420,000 sale price, and Angela incurred $30,000 of selling expenses.  How much income, if any, will Angela recognize from the sale of the apartment?

a. $0

b. $65,000

c. $95,000

d. $220,000

e. None of a-d is an amount Angela will recognize

Answer 1

Ans is b $65,000

Explanation: as per §121, gain on sale of principal residence that is used at-least 2 years out of 5 years is excluded upto $250,000 for a single individual.

And there is a exception to this general rule , if the condition of 2 year is not satisfied still a partial exclusion can be claimed for proportionate use of house subject to the following conditions:

1 Change of city due to employment change or

2 Health condition, prescribed by physician or

3 For other unforeseen circumstances

Since Angela has shifted to Arizona due to health problem, and used the house for 12 months its proportionate exclusion amount will be:

250,000 x 12/24 => $125,000

Now calculate realized gain on house

Sale of house = $1,420,000

Less: Selling Expense = -30,000

Net realized sale value = 1,390,000

Less: Purchase cost of house = -1,200,000

Realized Income on sale of house = 190,000

Since exclusion amount is $125,000

Her Recognized income = (190,000 – 125,000) = $65,000