Question

Linda purchased a home in Connecticut three years ago for $300,000. She had been working in Connecticut for the past 10 years. Yesterday, her employer decided to transfer her to the Billings, Montana branch, effective next month. Unfortunately, the real estate market has weakened over the past few years, and Linda is only able to sell her home for $270,000. Which of the following statements correctly identifies her tax consequences of the sale:

Select one:
a. Linda is not permitted to deduct the loss on her income tax return.
b. Linda’s loss will be reflected as a long-term capital loss on her tax return.
c. Linda’s loss will be reflected as a short-term capital loss on her tax return.
d. Linda will recognize an ordinary loss of $30,000.

Answer 1

Linda's loss will be reflected as a long-term capital loss on her tax return. When Linda purchased her home in Connecticut for $300,000 and is now only able to sell it for $270,000, she experiences a loss of $30,000 from the sale.

Step-by-step explanation:

The correct statement that identifies Linda's tax consequences of selling her home is option b. Linda's loss will be reflected as a long-term capital loss on her tax return.

When Linda sells her home for $270,000, she incurs a loss of $30,000 (the difference between the purchase price of $300,000 and the sale price of $270,000). This loss is considered a capital loss because it is a result of the sale of a capital asset (the home) which she owned for more than one year.

Linda can deduct this capital loss on her tax return as a long-term capital loss, subject to certain limitations.

According to U.S. tax laws, a loss on the sale of personal use property, such as a primary residence, is not deductible. Therefore, the correct answer is that Linda is not permitted to deduct the loss on her income tax return. If this were a property used for investment or business purposes, the loss could be treated differently for tax purposes.