Question

Amber Arthur (single) purchased a home in Palm Springs, Ca for $500,000. She moved into the home on December 1, year 0. She lived in the home as her primary residence until August 1 of year 4, when she sold the home for $850,000. Amber's tax bracket on taxable income before computing the gain on the sale of the house was 37%. What is the amount of tax on the gain on the sale of the home in Palm Springs (including Net Investment Income Tax if applicable).  

Select one:

a. $20,000

b. $23,800

c. $15,000

d. $0

e. $37,000

Answer 1

Per IRS, a taxpayer may qualify to exclude from his/her income all or part of any gain on the sale of his/her personal residence subject to satisfying the ownership and use tests.

To satisfy the ownership and use tests, during the 5 year period ending on the date of the same, under the Ownership and use tests:-

a.) Owned the home for atleast two years(the ownership test)

b.) Lived in the home as the main home for atleast 2 years (the use test)

If there is any gain on the sale of main home, subject to satisfying the conditions above, a taxpayer may exclude upto $250,000 of the gain from income if single and $500,000 if married filing jointly.

Based on the above considerations:-

Total gain for Amber = $850,000 - $500,000

Total gain for Amber = $350,000

Excludable gain = $250,000 (Satisfied ownership and use test)

Taxable gain = $100,000

The home sold by Amber qualifies as a long term capital gain since it is held for a period of approximately 4 years.

The tax rate on capital gains for high income tax payers is 20%. We know that Amber is a high income tax payer as she has been taxed at 37% on ordinary income

The tax on the sale of home in Palm springs is calculated as

$100,000 taxable gain * 20% = $20,000

Additionally, individual tax payers would be subject to an net investment tax if they investment income in excess of $200,000 for individuals filing separately. Since, $250,000 is exempt from taxes for Amber, her net investment tax is calculated as $100,000 * 3.8%(Per IRS) = $3,800

Based on the information available, the correct answer is Option B - $23,800.

Option A is incorrect because this option excludes the consideration of Net Investment income tax.

Option B is the correct answer. $23,800 is the correct answer which includes capital gains tax of $20,000 and Net investment income tax of $3,800.

Option C is incorrect. The tax rate is 20% on Capital gains for Amber. As such, this amount is incorrect.

Option D is incorrect. Amber would be charged a capital gains tax on $100,000 (excess of allowed deduction of $250,000)

Option E is incorrect. The capital gains for Amber will not be charged at ordinary income tax rates and hence this $37,000 is incorrect.