eve and Stephanie Pratt purchased a home in Spokane, Washington, for $427,500. T

Question

eve and Stephanie Pratt purchased a home in Spokane, Washington, for $427,500. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $812,500. (Leave no answer blank. Enter zero if applicable.)

a. What amount of gain on the sale of the home are the Pratts required to include in taxable income?

b. Assume the original facts, except that Steve and Stephanie live in the home until January 1 of year 3, when they purchase a new home and rent out the original home. They finally sell the original home on June 30 of year 5 for $812,500. Ignoring any issues relating to depreciation taken on the home while it is being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?

c. Assume the same facts as in part (b), except that the Pratts live in the home until January of year 4, when they purchase a new home and rent out the first home. What amount of realized gain on the sale of the home will the Pratts include in taxable income if they sell the first home on June 30 of year 5 for $812,500?

d. Assume the original facts, except that Stephanie moves in with Steve on March 1 of year 3 and the couple is married on March 1 of year 4. Under state law, the couple jointly owns Steve’s home beginning on the date they are married. On December 1 of year 3, Stephanie sells her home that she lived in before she moved in with Steve. She excludes the entire $135,000 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?

Explanation / Answer

1. If an individual sell his/ her main home during the year, then first $250,000 (or $500,000 in case of joint filing) of gain is not taxable by the IRS. However, the same can be taken opnly if such home is considered as the main home of the individuals. Main is the home in which the person has lived for atleast 24 months(or 2 years) out the last 5 years before the date of sale. In the given case, Pratts have used for more than 3 years before the sale and therefore, their first $500,000 is not taxable.

Calculation of Capital Gain or loss required to be included in taxable income

Gain not taxable in case of joint filing

(500,000 or gain whichever is lower)

NOTE: For the purpose of this question, it is assumed that Pratts are filing joint income tax returns.

2. In the given, Pratts have stayed in their original home for less than 24 months out of the total 5 years before the sale of home. As a result, all the capital gains arising from sale of the home will be considered as taxable income. The original home does not qualify the staying conditions as defined by IRS for main home.

Capital gains to be reported as taxable income = 812,500 - 427,500 = $385,000

3. If Pratts live in their original home till January of year 4 , then their total stay in the home is more than 24 months and therefore, the original home will be considered as their main home. As a result, the first $500,000 on the sale of such home will not be taxable as per IRS.

Gain not taxable in case of joint filing

(500,000 or gain whichever is lower)

NOTE: It is assumed that they are couples, if nor then $250,000 only will be exempt and remaining 135,000 will be taxable income.

4. As per IRS, if person has claimed any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, then it does not again qualify for the exclusion on home. Therefore in the given case, Stephanie has sold her home within last 2 years and also taken exclusion from main home amounting to $135,000 and hence couples are required to include all the gains on sale of property as thier taxable income.

Particulars Amount Sale Price 812,500 Less: Adjusted Basis of home 427,500 Gain on sale of home 385,000

Gain not taxable in case of joint filing

(500,000 or gain whichever is lower)

385,000 Gain to be reported as taxablle income 0

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