Question

Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $640,000. 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 $935,000.

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 $935,000. 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 $935,000?

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 $45,000 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

B. $295,000>>[sale value(935000) - Acquisition cost(640000)=Capital gain(295,000) ]

Explanation : They used the home as their principal residence for less than 2 yrs (Feb 1 of year 1 to Jan 1 of year 3) and the reason behind the leaving the home wasn’t due to unusual circumstances, so they don’t qualify for the home sale exclusion.Hence, they must recognize all $295,000 of gain realized on the sale.

C.$ 0

Explanation :The couple owned and used the home for more than two years (Feb 1 of year 1 to Jan of year 4) during the five-year period ending on the date of sale, so they qualify for the exclusion. Hence , they can exclude the entire $295,000 realized gain from taxable income.

D.$45,000

Explanation :Steve passes the ownership and use criteria for the purpose but Stephanie does not (even though she passes the use test) because she sold her own home on Dec 1, year 3 and excluded the entire gain on the sale of her home. She is ineligible to claim another exclusion for two years after Dec1, year 3. Hence Steve qualifies for the $ 250,000 exclusion (not the $500,000 exclusion because Stephanie does not qualify). Steve (and Stephanie) must recognize $45,000 of the $295,000 gain.

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