There are three subparts to this question. Marc, age 45, sells his personal resi
ID: 2349659 • Letter: T
Question
There are three subparts to this question. Marc, age 45, sells his personal residence on May 15, 2011, for $180,000. He pays $8,000 in selling expenses and $900 in repair expenses to help sell the residence. He has lived there since 1980, when he purchased it for $55,000. In 1996, he paid $4,000 to install central air conditioning. If Marc buys a new principal residence in December of the current year for $162,000, what are (a) the realized gain, (b) the recognized gain, and (c) the basis for the new residence?Explanation / Answer
Recognized Gain The IRS considers a recognized gain a profit earned from the sale of an asset. A recognized gain only considers the difference between the basis of the asset and the sale price. For example, if you own a share of stock with a basis of $25 and sell it for $35, you earn a recognized gain of $10. When selling securities, such as stocks or bonds, you often must pay capital gains taxes, depending on your overall income. However, if you sell your primary home for a profit, you may not face taxes on your recognized gain. As of the 2010 tax year, the IRS allows you to make a tax-free profit of $250,000 on a primary residence, or $500,000 if you are married and file jointly. Realized Gain Realized gains refer to the amount of money you actually earned in the sale of an asset. When calculating your realized gain, you must deduct any costs associated with the sale. For example, if you sell shares of stock, you can deduct brokerage fees when determining your actual earnings. The final earnings after all cost deductions equal your realized gain. The IRS allows you to deduct certain costs associated with the sale of an asset and typically taxes your earnings based on realized gains. now in your case : Realized gain = 180000 - 162000 = 18000 $ Recognized gain = 55000 + 4000 + 8000 + 900 = 67900 + 162000 = 229900 $ now gain = 229900 - 180000 = 49,900 $ basis for new home is 162000 $