Missy, age 30. has owned her principal residence (adjusted basis of $225,000) fo
ID: 2497289 • Letter: M
Question
Missy, age 30. has owned her principal residence (adjusted basis of $225,000) for five years. During the first three years of ownership, she occupied it as her principal residence. During the past two years, she was in graduate school and rented the residence. After graduate school. Missy returned to the same location where she previously worked. At this point, she purchased another residence for $400,000 and listed her old residence for sale at $340,000. Due to a slow real estate market, 11 months later Missy finally receives an offer of $330,000. If Missy accepts the $330,000 offer (i.e., 11 months after the listing date), and selling expenses are $20,000, then Missy's recognized gain is $ If Missy rejects the $330,000 offer and accepts another offer of S340,000 three months later (i.e., 14 months after the listing date), then Missy's recognized gain is $ Which offer should Missy accept (Assume she is in the 28% tax bracket.)Explanation / Answer
Home Sale Qualify for Maximum Exclusion-
In the following circumstances the home sale qualifies for maximum exclusion of $250,000 gain.
(‘1) Owner has used the home as principal residence at least 2 year out of the last 5 years before the sale date.
(‘2) For ownership it is necessary that you owned the home for at least 2 years during the last 5 year.
Case-1 - $330,000 after 11 month of listing date
Year
Ownership
Residence
1
Yes
Yes
2
Yes
Yes
3
Yes
Yes
4
Yes
-
5
Yes
-
6
Yes
-
7
Not Applicable
Not Applicable
In this case both condition satisfied hence Missy will be eligible for maximum exclusion of gain up to $250,000.
Case-1 - $340,000 after 14 month of listing date
Year
Ownership
Residence
1
Yes
Yes
2
Yes
Yes
3
Yes
Yes
4
Yes
-
5
Yes
-
6
Yes
-
7
Yes
-
In this case Missy does not qualify the second condition. Home is not used as main residence for at least 24 months out of last 5 years up to the date of sale. Hence no exclusion available and all gain taxable in this case.
(‘a) and (‘b)
Calculation of Gain
Particular
Selling Price
$330,000
Selling Price $340,000
Sale Price
330,000
340,000
Less- Selling Expense
20,000
20,000
Amount Realised
310,000
320,000
Less- Adjusted Basis
225,000
225,000
Gain
85,000
95,000
Less: Exclusion
85,000
-
Taxable Gain
0
95,000
Tax on Gain
0
26,600
Net Gain Realised after Tax
85,000
68,400
(‘c ) Hence Missy should accept $330,000
Year
Ownership
Residence
1
Yes
Yes
2
Yes
Yes
3
Yes
Yes
4
Yes
-
5
Yes
-
6
Yes
-
7
Not Applicable
Not Applicable