Stewart, age 44, sells his personal residence of 4 years on June 14, 2014, for $

Question

Stewart, age 44, sells his personal residence of 4 years on June 14, 2014, for $185,000. The expenses of sale are $15,000 and he has paid for capital improvements of $3,000. Stewart purchased the residence for $100,000. On February 2, 2015, Stewart purchases and occupies a new residence at a cost of $200,000.

a. Calculate the gain realized on the sale of Stewart's residence.

b. How much gain must be recognized on the sale of Stewart's residence?

c. Calculate Stewart's basis in the new residence.

Explanation / Answer

Amount realised = Sales – Expense on sales

                           = 185000 – 15000

                          = 170000

Gain realised = Amount realised - Total Adjusted Basis (Cost of old residence       + Improvement)

                           = 170000 – 100000 – 3000

                           = 67000

         Gain recognised = Adjusted sales price – Cost of new residence

                                    = 170000 - 200000

                                    = 0

          So, there is no gain recognised on the sale of Stewart's residence

Gain Realized But Not Recognized = Gain realized - Gain recognized

                                                         = 67000 -0

                                                         = 67000

Basis in New Residence = Cost of new residence - Gain realized but not recognized

                                        = 200000 – 67000

                                        = 133000

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