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. (Leave no answer blank. Enter zero if applicable.)

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

a.

$0.

Explanation:

They are allowed to exclude the entire realized gain.

                       

Amount realized from the sale       $          $902,500

Adjusted basis                    $535,000

           

Gain realized            $          $367,500  

           

Since the Pratts owned and used the Spokane home for at least 2 years during the 5-year period ending on the date of the sale, they qualify for the gain exclusion. The maximum exclusion for married taxpayers filing jointly is $500,000. Because the exclusion is more than the gain realized on the sale, the entire gain is excluded from taxation. The Pratts will not be required to pay any taxes on the gain on the sale of their home.

b.

$367,500.

Explanation:

Because the Pratts used the home as their principal residence for less than 2 years (February 1 of year 1 to January 1 of year 3) and their reason for leaving wasn’t due to unusual circumstances they don’t qualify for the home sale exclusion. Consequently, they must recognize all $367,500 of gain realized on the sale.

c.

$0.

Explanation:

The Pratts owned and used the home for at least two years (February 1 of year 1 to January of year 4) during the five-year period ending on the date of sale, so they qualify for the exclusion. Consequently, the Pratts can exclude the entire $367,500 realized gain from taxable income.

d.

$117,500

Explanation:

Steve meets the ownership and use test but Stephanie does not (even though she meets the use test) because she sold her own home on December 1, year 3 and excluded the entire gain on the sale of her home. She is not eligible to claim another exclusion for two years after December 1, year 3. Consequently, Steve qualifies for the $250,000 exclusion (not the $500,000 exclusion because Stephanie does not qualify). Steve (and Stephanie) must recognize $117,500 of the $367,500 gain.