Question

During 2020, Mike and Michelle, 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 May at a cost of $6,000 and paid for the work immediately. They sold the house in May for $600,000. Broker's commissions and other selling expenses amounted to $50,000. They purchased a new residence in July for $375,000. The adjusted basis of the new residence is $381,000.

A) Mike and Michelle incur a recognized gain of $275,000.

B) Mike and Michelle incur a recognized gain of $169,000.

C) Mike and Michelle incur a recognized gain of $144,000.

D) Mike and Michelle incur a recognized gain of $125,000.

Answer 1

Mike and Michelle's recognized gain from the sale of their residence is calculated by subtracting the adjusted basis and selling expenses from the selling price, which equates to a recognized gain of $344,000.

Step-by-step explanation:

When calculating the recognized gain from the sale of a property, one must account for the original purchase price (basis), any improvements made to the property that add to its value, the selling price, and any associated selling costs. Mike and Michelle had a residence with a basis of $200,000, spent $6,000 on painting (which increases the basis), and then sold the residence for $600,000 with selling expenses amounting to $50,000. The couple's recognized gain would therefore be calculated as follows:

Selling Price: $600,000

Adjusted Basis: Original Basis + Improvements = $200,000 + $6,000 = $206,000

Selling Expenses: $50,000

Recognized Gain: Selling Price - Adjusted Basis - Selling Expenses = $600,000 - $206,000 - $50,000 = $344,000

This calculation results in a recognized gain of $344,000, not $125,000.