Question

Steve Smith sold for $380,000.00 in September of 2019 his residence that he had purchased in 2015 for $175,000.00. He made capital improvements during his 4-year ownership totaling $20,000.00. He paid selling expenses of $10,000.00.

  

  

What is his recognized gain should he elect to use Section 121?

  

Suppose instead that Steve sold his home in November 2019 for $ 520,000.00.   

            What is his recognized gain should she elect §121 treatment?      

  

How long does he have to own and use the house as a principal residence to qualify for §121 exclusion treatment?    

  

Answer 1

As Per Section 121 of the US Code- Exclusion of Gain from the sale of principle residence

Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.

Therefore,

Scenario A

Calculation of Capital Gain

Sale Price $380,000

Less:

Purchase Price $175,000

Capital Improvement $20,000

Selling Expense $10,000

Gain $175,000

There will be no capital gain recognised as the gain is less than $250,000

Scenario B

If the house would had been sold for $520,000

Then the capital gain would had been

$520,000-$205,000= $315,000

As the capital gain is more than $250,000

$315,000 will be included in the gross income.

As per Section 121(a)- Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.