In 2004, Angela purchased a personal residence from Victor. She paid $300,000 fo

Question

In 2004, Angela purchased a personal residence from Victor. She paid $300,000 for the residence. Victor paid real estate taxes of $9,125 for the real estate property tax year, of which $5,500 was allocable to the portion of the year that Angela owned the residence. Angela sold the residence to Earl for $350,000 on December 8, 2011. Earl paid real estate taxes of $10,220 for the real estate property tax year, of which $9,576 was allocable to the portion of the year that Angela owned the residence. Angela has provided you with the sale, the amount realized for the residence, her realized gain on the sale, and her property tax deduction for 2011. Write a letter to Angela Henson, who lives at 17250 Calistoga Drive, Eldorado, KS 67402, to communicate your answers.

Explanation / Answer

The basis for purchased property is a purchase price - this as you purchased a property in 1999 for $300,000 - this was the basis. Real estate taxes are not included in the basis and are deducted in the year they are paid on the schedule A if you itemize. As you actually did not pay real estate taxes - you may not deduct them. The basis should be adjusted by purchase expenses allocated to the buyer, expenses to obtain the mortgage or refinance over the time you owned the property, improvement expenses, and selling expenses allocated to the seller. Assuming your selling price was $350,000 and adjusted basis - $300,000 - you realized the capital gain $350,000 - $300,000 = $50,000. If you owned and used the property as a primary residence for at least two years out of last five before the sale you may exclude the gain - up to $250,000 - from your taxable income. If you met this test - your gain will not be taxable. If not - the gain will be treated as long term because you owned the property for more than a year and will be taxed at reduced rate 5% or 15% depending on your total income.

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