During 2017, Zeke and Alice, a married couple, decided to sell their residence,

Question

During 2017, Zeke and Alice, a married couple, decided to sell their residence, which had a basis of $200,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately. They sold the house in May for $800,000. Broker’s commissions and other selling expenses amounted to $50,000. They purchased a new residence in July for $400,000. What is the recognized gain and the adjusted basis of the new residence? a. $45,000 and $400,000. b. $50,000 and $400,000. c. $100,000 and $600,000. d. $550,000 and $800,000.

Explanation / Answer

$50,000 and $400,000. (which is Option B)

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Explanation:

The value of recognized gain is determined with the use of following table:

The adjusted basis of the residence will be the value of the new residence purchased which is $400,000. There will be no deduction. There will be no adjustment for repairs done to the house.

Sale Value of House 800,000 Less Broker's Commission and Selling Expenses 50,000 Net Realized Value 750,000 Less Adjusted Basis 200,000 Realized Gain 550,000 Exclusion Under Section 121 500,000 Recognized Gain $50,000

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