Question

Dawn (single) purchased her home on July 1, 2005. On July 1, 2014 Dawn moved out of the home. She rented out the home until July 1, 2015 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2015 gross income?

A. $0
B. $207,000
C. $225,000
D. $230,000

Answer 1

Dawn can exclude the entire $230,000 gain from her gross income as it falls under the IRS Section 121 exclusion, since she met the ownership and use requirements and sold the home within the qualifying timeframe.

Step-by-step explanation:

When Dawn sold her home, she realized a $230,000 gain. The rules for excluding gain on the sale of a primary residence are specified under the Internal Revenue Service (IRS) Section 121 exclusion. To qualify for the full exclusion of $250,000 for single filers (or $500,000 for married filing jointly), the individual must have owned and used the home as their primary residence for at least 2 out of the 5 years preceding the sale. In Dawn's case, she lived in the home as her primary residence from July 1, 2005, to July 1, 2014, exceeding the 2-year requirement.

Since she sold the home within 3 years of moving out, she still falls within the 5-year timeframe needed to qualify for the exclusion. Therefore, Dawn is eligible to exclude the entire $230,000 gain from her 2015 gross income, so the correct answer is D. $230,000.