Question

In October of 2016, Jack and Judy, husband and wife, sold their (only) residence that they had purchased in 1999 for $400,000 paying $300,000 in cash with a $100,000 mortgage from ABC Bank. They lived there the entire time they owned the home, and they made repairs to the electric and plumbing during their 10-year ownership totaling $40,000. What, if any, is their recognized gain or loss to be included on their jointly filed Form 1040 for 2017?

a.       $400,000.

b.       $0.

c.       $500,000.

d.       $440,000.

e.       None of the above.

My answer is (b) 0. Under the MFJ rules for sale of home they are able to exclude up to a 500,000 gain or loss before any amount is recognized. Am I correct and if not could you show me how you derived at your answer? Thanks!

Answer 1

as per the tax rules which apply when you sell or otherwise give up ownership of a home. If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.

income under IRC section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The IRS has issued proposed regulations to clarify how these rules work in certain situations.

a taxpayer is considered to have owned and used a home as a principal residence during the time his or her deceased spouse used the home as a principal residence. This rule applies as long as on the day the home is sold the taxpayer’s spouse is deceased and the taxpayer has not remarried. Divorced spouses can also benefit from the ownership and use periods of former spouses to satisfy the exclusion requirements.

taxpayer must recognize gain on any portion of a residential property they don’t use for residential purposes. Any post-May 6, 1997 depreciation allowable on the property triggers recognition of otherwise excludable gain.

(as your answer are correct)