Question

Sarah (single) purchased a home on January 1, 2008, for $600,000. She eventually sold the home for $800,000. What amount of the $200,000 gain on the sale does Sarah recognize in each of the following alternative situations? (Assume accumulated depreciation on the home is $0 at the time of the sale.) Note: Leave no answer blank. Enter zero if applicable. Required: a. Sarah used the home as her principal residence through December 31, 2019. She used the home as a vacation home from January 1, 2020, until she sold it on January 1, 2023. b. Sarah used the property as a vacation home through December 31, 2019. She then used that home as her principal residence from January 1, 2020, until she sold it on January 1, 2023. Note: Round intermediate percentage computation to 2 decimal places. c. Sarah used the home as a vacation home from January 1, 2008, until January 1, 2022. She used the home as her principal residence from January 1, 2022, until she sold it on January 1, 2023. d. Sarah used the home as a vacation home from January 1, 2008, through December 31, 2016. She used the home as her principal residence from January 1, 2017, until she sold it on January 1, 2023. Note: Round intermediate percentage computation to 2 decimal places. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below.

Answer 1

Capital gains exclusion on the sale of a principal residence can apply to scenarios where the homeowner lived in the property for at least two out of five years before selling. Sarah may be able to exclude up to $250,000 of the gain in certain cases, depending on her use of the home as her principal residence.

Step-by-step explanation:

Understanding how capital gains on property sales work is essential for tax reporting and financial planning. When considering the amount of gain to recognize on the sale of a home, the Internal Revenue Service (IRS) allows for a capital gains exclusion on the sale of a principal residence under certain conditions. Specifically, a single taxpayer can exclude up to $250,000 of capital gains if they have owned and used the property as their principal residence for at least two out of the five years prior to the sale. This is outlined in Section 121 of the Internal Revenue Code.

In scenarios (a) and (d) where Sarah used the home as her principal residence for the required period, she may be eligible to exclude up to $250,000 of the gain. In scenario (b), where the property was converted to a principal residence only later, a prorated portion of the gain may be excludable based on the duration of principal residence use out of the total ownership period. In scenario (c), the exclusion likely does not apply as the property was not used as a principal residence for the required time. The precise calculation can involve more complex rules, including possible partial exclusions and non-qualifying use periods.