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This year, Leron and Sheena sold their home for $609,500 after all selling costs. Under the...

This year, Leron and Sheena sold their home for $609,500 after all selling costs. Under the following scenarios, how much taxable gain does the home sale generate for Leron and Sheena?

A) Leron and Sheena bought the home three years ago for $105,000 and lived in the home until it sold.

B) Leron and Sheena bought the home one year ago for $283,500 and lived in the home until it sold.

C) Leron and Sheena bought the home five years ago for $168,000. They lived in the home for three years until they decided to buy a smaller home. Their home has been vacant for the past two years.

Solutions

Expert Solution

Answer-Leron and Sheena are assumed to be filing Joint return. If they meet the 2 year ownership and 2 year use test then they will be eligible for exclusion of $250000 each or $500000 total of Gain from sale of home since they are assumed to be filing joint return.

PART A

Sale price of Home = $609500
Purchase price of home = $105000
Gain on sale of Home= (Sale of home- Purchase price of home) = ($609500- $105000) = $504500

Since they have owned and lived in house for 3 years so they satisfy 2 year ownership and 2 year use test. So $500000 of the long term capital Gain can be excluded for computation of Taxable income
Thus, Taxable Income = (Gain on sale of Home- $500000) = ($504500 - $500000) = $4500

PART B

Sale price of Home = $609500
Purchase price of home = $283500
Gain on sale of Home= (Sale of home- Purchase price of home) = ($609500- $283500) = $326000

Since they have owned and lived in house for 1 year only, so they do not satisfy 2 year ownership and 2 year use test. So $500000 of the long term capital Gain cannot be excluded for computation of Taxable income and entire Gain is their taxable income.
Thus, Taxable Income = Gain on sale of Home = $326000

PART C

Sale price of Home = $609500
Purchase price of home = $168000
Gain on sale of Home= (Sale of home- Purchase price of home) = ($609500- $168000) = $441500

Since they have owned the house for 5 years and lived in the house for 2 out of 5 years, so they satisfy 2 year ownership and 2 year use test. So $500000 of the long term capital Gain can be excluded for computation of Taxable income and since their Gain from sale of Home is less that $500000 , so entire amount will be excluded.
Thus, Taxable Income = $0

ekkarill92 answered 1 year ago
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