Question

Jenna, who is single, sold her principal residence on December 1, 2014, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2015 that she occupied until July 1, 2015 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2015 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2015?

A) $20,000
B) $0
C) $40,000
D) $10,000

Answer 1

Jenna may exclude $20,000 of the gain from the sale on October 1, 2015.

Step-by-step explanation:

Jenna may exclude $20,000 of the gain from the sale on October 1, 2015.

According to the IRS rules under Section 121, to qualify for the exclusion of gain on the sale of a principal residence, the taxpayer must have owned and used the property as their primary residence for at least 2 out of the 5 years immediately before the sale.

Since Jenna purchased the Pensacola residence on January 1, 2015, and occupied it until July 1, 2015, she only meets the ownership requirement of Section 121. Therefore, she may exclude a portion of the gain on the sale of the Pensacola residence. In this case, the period of ownership is 9 months (January 1, 2015, to October 1, 2015), which is 75% of the required 2-year ownership period. Thus, she can exclude 75% of the gain, which is $30,000 (75% of $40,000). However, since the gain from the sale on October 1, 2015, is only $40,000, the maximum exclusion she can claim is limited to the gain itself, which is $40,000.

Therefore, Jenna may exclude $20,000 of the gain from the sale on October 1, 2015.