Question

William and Kate married in 2015 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. William's adjusted basis in his old residence was $200,000; Kate's adjusted basis in her old residence was $120,000. In late 2015, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2015?

A) $250,000
B) $370,000
C) $0
D) $320,000

Answer 1

The total gain to be excluded from the sale of William and Kate's separate residences in 2015 is $370,000. William can exclude $250,000 and Kate can exclude her entire gain of $70,000. The correct answer is option: B) $370,000

Step-by-step explanation:

• William and Kate must calculate capital gains on the sale of their individual residences. William sold his residence for $500,000, which had an adjusted basis of $200,000, resulting in a gain of $300,000.
• Kate sold her home for $190,000, with an adjusted basis of $120,000, resulting in a gain of $70,000.
• The IRS allows individuals to exclude up to $250,000 of capital gains on the sale of a primary residence provided certain conditions are met, which include owning and living in the residence for at least two of the five years preceding the sale.
• Since both William and Kate meet these criteria, they can each exclude up to $250,000 of the gain from the sale of their respective primary residences.
• The total gain from the sale of both homes is $370,000 ($300,000 from William and $70,000 from Kate), but considering the exclusion limit, William can exclude $250,000 of his gain and Kate can exclude the entire $70,000 gain from her sale. Therefore, the answer is B) $370,000.