Question

Steve Pratt, who is single, purchased a home in Riverside, California, for $400,000. He moved into the home on February 1 of year 1. He lived in the home as his primary residence until June 30 of year 5 , when he sold the home for $700,000. Note: Leave no answer blank. Enter zero if applicable. Required:

a. What amount of gain will Steve be required to recognize on the sale of the home?
b. Assume the original facts, except that the home is Steve's vacation home and he vacations there four months each year. Steve does not ever rent the home to others. What gain must Steve recognize on the home sale?
c. Assume the original facts, except that Steve married Giuseppina on February 1 of year 3 and the couple lived in the home until they sold it in June of year 5. Under state law, Steve owned the home by himself. How much gain must Steve and Giuseppina recognize on the sale (assume they file a joint return in year 5 )?

Answer 1

Steve will need to recognize a gain of $300,000 on the sale of his home. If the home is Steve's vacation home, he will need to recognize a proportionate gain based on the time the home was used. If Steve and Giuseppina file a joint return, they will need to recognize a gain of $300,000 for the three years they owned the home.

Step-by-step explanation:

a. To determine the amount of gain that Steve will be required to recognize on the sale of his home, we need to calculate his basis in the home and subtract it from the sale price. Steve's basis is the original purchase price of $400,000. The gain will be the difference between the sale price of $700,000 and the basis, which is $300,000.

b. If the home is Steve's vacation home and he vacations there for four months each year, the gain that he must recognize on the home sale will be calculated based on the proportion of time the home was used as a vacation home versus the total time he owned it. Assuming he owned the home for five years, Steve would need to recognize 4/12th of the gain.

c. If Steve and Giuseppina file a joint return and owned the home from year 3 to year 5, they need to calculate the gain based on their combined ownership period. Their basis in the home would still be $400,000. The gain would be the difference between the sale price of $700,000 and the basis, which is $300,000. Since they owned the home for three years, they would need to recognize the gain for that period.

Answer 2

The recognized gain on the sale of Steve's home varies depending on its use and his marital status. As a primary residence and single filer, he recognizes $50,000. As a vacation home, it's the full $300,000 gain. Married and meeting requirements, he and Giuseppina would recognize no gain.

Step-by-step explanation:

The amount of gain Steve will be required to recognize on the sale of his home depends on various factors under U.S. tax law, including whether the home was his primary residence and the duration of his residence there. The gain is calculated by subtracting the purchase price from the sale price.

a. Primary Residence:

Since Steve lived in the home for at least 2 years out of the 5 years before the sale, he is eligible for the exclusion of capital gains on the sale of a primary residence, which is up to $250,000 for single filers. The gain on the sale is the sale price of $700,000 minus the purchase price of $400,000, which equals a total gain of $300,000. However, Steve will only recognize capital gains on the amount that exceeds the exclusion limit, which in this case is $50,000 ($300,000 gain minus $250,000 exclusion).

b. Vacation Home:

As the home is not his primary residence, Steve cannot exclude any of the gain. Therefore, the full gain of $300,000 ($700,000 sale price minus $400,000 purchase price) must be recognized.

c. Married Filing Jointly:

Since Steve and Giuseppina are married and file a joint return, they are eligible for a $500,000 exclusion if they both meet the residency requirement. Assuming they do, their recognized gain will be $0 as the actual gain of $300,000 does not exceed the $500,000 exclusion limit.