The following information applies to the questions displayed below.] This year,

Question

The following information applies to the questions displayed below.]

This year, Leron and Sheena sold their home for$1,372,500 after all selling costs. Under the following scenarios, how much taxable gain does the home sale generate for Leron and Sheena? (Leave no answer blank. Enter zero if applicable.)

a. Leron and Sheena bought the home three years ago for $225,000 and lived in the home until it sold.

b. Leron and Sheena bought the home one year ago for $1,125,000 and lived in the home until it sold.

c. Leron and Sheena bought the home five years ago for $877,500. They lived in the home for three years until they decided to buy a smaller home. Their home has been vacant for the past two years.

Explanation / Answer

The gain on sale of tax payers personal residence is subject to a $250,000 exclusion from gross income ($500,000 for married filing jointly); excess gain over the applicable $ limit is taxable

Personal residence = Owned and used the home as principal residence for at least 2 of the previous 5 years (for married filing jointly, either spouse may own, but both must use)

May use the exclusion multiple times over lifetime (but not more than once every 2 years)

a.

Gain = 1,372,500 - 225,000 = 1,147,500

Taxable gain = 1,147,500 - 500,000 = 647,500

($500,000 is excluded from gain a they lived in the home for 2 of the previous 5 years)

b.

Taxable gain = 1,372,500 - 1,125,000 = 247,500

(as the tax payer has not lived atleast 2 of the previous 5 years, all the gain is recognized)

c.

Gain = 1,372,500 - 877,500 = 495,000

Taxable gain = 0

(as the tax payer has lived atleast 2 of the previous 5 years, gain is not recognized)

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