Question

Moore Family Tax Facts:

The Moore Family currently reside at 122 Janney Avenue, Harrisburg, PA 19917. They moved to this new home earlier in 2018.

Old Address – 23 Ascot Drive, Lansdale, PA 19420.

Purchased Ascot Drive in September of 1999 for $150,000.

Sold Ascot Drive in January 2, 2018 for $275,000.

Buyers paid all of the closing costs and real estate fees.

New home at 122 Janney Avenue was purchased for $350,000.

please prepare a tax memo researching the Federal Tax Treatment of the Sale of their Ascot Drive, Lansdale residence. You must cite the relevant code section(s) and the administrative guidelines.

Answer 1

As per section 1001 (a) of Internal Revenue Code (IRC), gain from sale of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011. Loss shall be excess of the adjusted basis provided in section 1011 over amount realized.

As per section 1001 (b) of IRC, the amount realized from sale of property shall be sum of any amount received plus fair value of the property (other than money) received. In this case, proceeds from sale of property (Ascot Drive) on January 2, 2018 is $ 275,000. So amount realized for this is $275,000.

As per section 1011 of IRC, the adjusted basis for determining gain or loss from sale of property shall be basis as defined in section 1012. As per section 1012, the basis of the property shall be cost of such property. Ascot Drive house was purchased for $150,000 in September, 1999. So adjusted basis for this property is $150,000 as per section 1011 of IRC.

Realized Gain from sale of 'Ascot Drive' property is $125,000 i.e. (Amount Realized $275,000 - Adjusted Basis $150,000).

As per section 121(a) of IRC, gross income shall not include gain from sale of property if during the 5 year period ending on sale of the property, such property has been owned and used by taxpayer as taxpayer's principal residence for the period aggregating 2 years or more. As per section 121 (b) of IRC, amount of gain excluded from gross income from sale of property shall not exceed $250,000 for individual taxpayers or $500,000 for married filling jointly.

In this case realized gain from sale of this Ascot Drive Residence is $125,000. This Ascot drive property has been used as principal residence purpose since acquiring in September 1999 (i.e. more than 2 years during last 5 years from the date of the sale). Hence entire realized gain of $125,000 would be excluded from gross income as per section 121 (b) of IRC. So taxable income from this sale of Ascot Drive Residence is zero.