III. Federal Taxation of Property Transactions

Question 1

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

I. Categories of Assets

Answer 1

1. Ordinary Assets
   
   1. Inventory and accounts/notes receivables are ordinary assets.
   2. Depreciable property and realty used in a trade/business that have been owned for a year or less are ordinary assets.
   3. Generally, copyrights and musical, artistic, and literary works are ordinary assets if held by the person who created the work. A composer can elect to have his or her musical work treated as a capital asset.
2. Section 1231 Assets—Depreciable property used in a trade/business and realty that have been owned for more than one year are Section 1231 assets.
3. Capital Assets
   
   1. Capital assets do not include the items listed above as ordinary and Section 1231 assets.
   2. Most other types of property, including property held for investment use and personal use, are capital assets. Goodwill of a corporation is also a capital asset. Patents are usually treated as capital assets.

Question 2

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

III. Special Basis Issue

A. Basis Issues for Gifts

1. If property is gifted to a taxpayer, the donee’s basis is:
   
   1. Gain basis = adjusted basis of the donor.
   2. Loss basis = lower of:
      
      1. Fair market value ( FMV) at date of gift, or
      2. Adjusted basis of the donor.
   3. Depreciable basis = gain basis.
   4. The basis is increased for the portion of any gift tax paid by the donor due to appreciation in the property:

Answer 2

Example

Tom received a gift of property with an FMV of $105,000 and an adjusted basis of $75,000. The donor paid a gift tax of $18,000 on the transfer. Tom’s basis for the property would be $81,000 determined as follows:

($105,000 FMV less $75,000 basis)

$75,000 basis plus [$18,000 gift tax×______________________________] = $81,000

($105,000 FMV less $15,000 exclusion)

Question 3

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

III. Special Basis Issue

B. Tax Effects of Basis for Gifts

Answer 3

1. A gain is recognized only if the donee sells property for more than the gain basis.
2. A loss is recognized only if the donee sells property for less than the loss basis.
3. If the property is sold by the donee for an amount in-between the gain and loss basis, no gain or loss is recognized.

Example

1. TP receives a used auto from his father as a gift. The father bought the auto for $10,000 several years ago and the auto is worth $15,000 at the time of the gift. TP will take his father’s basis ($10,000) in the auto.
2. If the father had a basis of $20,000 in the auto, in TP’s hands the auto would have a gain basis of $20,000 and a loss basis of $15,000. Loss can only be recognized to the extent that the auto is sold for less than $15,000. Gain can only be recognized to the extent that the auto is sold for more than $20,000.
3. If the automobile is sold for an amount between $15,000 and $20,000, no gain or loss is recognized.

Question 4

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

III. Special Basis Issue

C. Holding Period of Gifted Property

1. If the gain basis is used to compute realized gain or loss, the holding period of the property for the donee includes the holding period of the donor.
2. If the loss basis is used, the holding period of the donee begins on the date of the gift.

Answer 4

Example

1. X purchased property on July 14, 2019, for $10,000. X made a gift of the property to Z on June 10, 2020, when its FMV was $8,000. Since Z’s basis for gain is $10,000, Z’s holding period for a disposition at a gain extends back to July 14, 2019. Since Z’s $8,000 basis for loss is determined by reference to FMV at June 10, 2020, Z’s holding period for a disposition at a loss begins on June 11.
2. In year 1, Dylan Coile bought a diamond necklace for her own use at a cost of $10,000. In year 10, when the fair value was $12,000, Dylan gave this necklace to her daughter, Hannah. No gift tax was due or paid on the gift of the necklace.

Hannah’s holding period for the gift:

1. Starts in year 10.
2. Starts in year 1.
3. Depends on whether the necklace is sold by Hannah at a gain or at a loss.
4. Is irrelevant because Hannah received the necklace for no consideration of money or money’s worth.

The correct answer is B (starts in year 1). Because fair value ($12,000) at the date of the gift is more than the donor’s adjusted basis ($10,000), the donor’s adjusted basis of $10,000 is the donee’s basis for gain and basis for loss. Thus, because the donor’s adjusted basis is also the donee’s basis, the holding period of the donee includes the holding period of the donor.

Question 5

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

III. Special Basis Issue

D. Inheritances—Basis and Holding Period

1. The basis of property acquired from a decedent is the fair market value at the date of death, or the FMV on the alternate valuation date (six months after the date of death) if that date is selected by the executor as the valuation date.
2. Holding period is deemed to be long-term.

Answer 5

Example

Ann received 100 shares of stock as an inheritance from her uncle Henry, who died January 20, 2019. The stock had an FMV of $40,000 on January 20, and an FMV of $30,000 on July 20, 2019. The stock’s FMV was $34,000 on June 15, 2019, the date the stock was distributed to Ann.

If the alternate valuation is not elected or if no estate tax return is filed, Ann’s basis for the stock is its FMV of $40,000 on the date of Henry’s death. If the alternate valuation is elected, Ann’s basis will be the stock’s $34,000 FMV on June 15 (the date of distribution) since the stock was distributed to Ann within six months after the decedent’s death.

Question 6

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1.

Boone gave 100 shares of the stock to another of Carter’s relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share.

What was Dixon’s basis in the 100 shares of stock when acquired on June 1?

1. $5,000
2. $5,100
3. $10,000
4. $15,000

Answer 6

1.

When the shares are bequeathed to Boone, his basis in the shares is the fair market value at the date of death, which is $100 per share. When the stock splits 2 for 1, Boone then owns 200 shares of stock with a basis of $50 each. When the shares are gifted to Dixon, she takes the basis in the stock that Boone had, or $50. Therefore, Boone’s total basis is $5,000 (100 shares × $50 per share).

Question 7

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

Bluff purchases equipment for business use for $35,000 and makes $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gives the equipment to Russett for business use. At the time the gift is made, the equipment has a fair market value of $32,000. Ignoring gift-tax consequences, what is Russett’s basis in the equipment?

1. $31,000
2. $32,000
3. $35,000
4. $36,000

Answer 7

1.

Bluff’s adjusted basis in the equipment before the gift is $31,000 (cost basis of $35,000 + $1,000 capital improvement – $5,000 cost recovery). When property is gifted, the donee has two bases in the gifted property: the gain basis is the donor’s adjusted basis of $31,000 and the loss basis (also $31,000) is the lower of the adjusted basis ($31,000) and fair market value ($32,000). Therefore, Russett’s gain and loss bases are both $31,000.

Question 8

III. Federal Taxation of Property Transactions

72. Sales and Dispositions of Assets

O’Brien purchased two automobiles for personal use. Automobile 1 had an adjusted basis of $20,000, and automobile 2 had an adjusted basis of $10,000. O’Brien sold automobile 1 for $15,000 and automobile 2 for $15,000. What gain or loss should O’Brien recognize on the sales of the automobiles?

1. Automobile 1, loss of $5,000; automobile 2, gain of $5,000
2. Automobile 1, loss of $0; automobile 2, gain of $5,000
3. Automobile 1, loss of $5,000; automobile 2, gain of $0
4. Automobile 1, loss of $0; automobile 2, gain of $0

Answer 8

2.

Correct! Both automobiles are used for personal activities. Losses from the sale of personal use assets are not deductible, so the $5,000 realized loss from Auto 1 is not recognized. Gains from the sale of personal use assets are recognized, so the $5,000 gain from selling auto 2 is recognized.

Question 9

III. Federal Taxation of Property Transactions

73. Capital Gains and Losses

Answer 9

Example

An individual has a $4,000 STCL and a $5,000 LTCL for 2018. The $9,000 net capital loss results in a capital loss deduction of $3,000 for 2018, while the remainder is a carryover to 2019. Since $3,000 of the STCL would be used to create the capital loss deduction, there is a $1,000 STCL carryover and a $5,000 LTCL carryover to 2019. The $5,000 LTCL carryover would first offset gains in the 28% group.

Question 10

III. Federal Taxation of Property Transactions

73. Capital Gains and Losses
74. 8% NII

Answer 10

Example

A single filer has active income of $160,000 and net investment income (NII) of $100,000. The 3.8% tax will be paid on $60,000 of income. The excess of AGI ($260,000) over the AGI threshold ($200,000) is $60,000 versus the NII of $100,000. Because the tax applies to the lesser of these two amounts, it will be 3.8% of $60,000, or $2,280.

Collectible: A tangible personalty such as coins, art, and antiques purchased for investment purposes. Gold and silver are also classified as collectibles subject to the 28% rate.

Question 11

III. Federal Taxation of Property Transactions

73. Capital Gains and Losses

Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Sec. 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Sec. 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Sec. 1244 loss that Summer can deduct for the current year?

1. $35,000 ordinary loss.
2. $35,000 capital loss.
3. $50,000 ordinary loss.
4. $50,000 capital loss.

Answer 11

3.

Even though the NOL includes $15,000 ($20,000 × 3/4) of Section 1244 loss that can be combined with the current Section 1244 loss of $50,000, the maximum deduction for a given tax year is $50,000 for a Section 1244 loss ($100,000 if married filing jointly).

Question 12

III. Federal Taxation of Property Transactions

73. Capital Gains and Losses

A married individual invested in Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7?

1. $3,000
2. $53,000
3. $103,000
4. $157,000

Answer 12

3.

CORRECT! The $100,000 ordinary loss is deductible and the remaining capital loss is limited to $3,000. A married taxpayer can deduct up to $100,000 of losses for Section 1244 stock. The other $57,000 loss is a long-term capital loss, of which $3,000 of the capital loss is deductible..

Question 13

III. Federal Taxation of Property Transactions

73. Capital Gains and Losses

Jackson, a single individual, inherits Bean Corp. common stock from his parents. Bean is a qualified small business corporation under Code Section 1244.

The stock costs Jackson’s parents $20,000 and has a fair market value of $25,000 at the parents’ date of death. During the year, Bean declares bankruptcy and Jackson is informed that the stock is worthless.

What amount may Jackson deduct as an ordinary loss in the current year?

1. $0
2. $3,000
3. $20,000
4. $25,000

Answer 13

1.

To qualify for ordinary treatment, 1244 stock must be issued to the taxpayer for money or other property transferred by the taxpayer to the corporation.

Question 14

III. Federal Taxation of Property Transactions

74. Section 1231 Assets

The results of UNA Corporation’s first six years of operations are presented below.

Year Results of Operations

1 Section 1231 losses of $50,000

2 Section 1231 losses of $30,000

3 Section 1231 gains of $75,000

4 Section 1231 losses of $20,000

5 Section 1231 losses of $30,000

6 Section 1231 gain of $80,000

UNA corporation’s year-six Section 1231 gain can best be characterized as

1. $80,000 Section 1231 gain.
2. $50,000 ordinary income; $30,000 Section 1231 gain.
3. $80,000 ordinary income.
4. $55,000 ordinary income; $25,000 Sec. 1231 gain.

Answer 14

4.

The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income. The $75,000 gain in Year 3 was recaptured as ordinary income by $50,000 of the Year 1 loss and $25,000 of the Year 2 loss. Note that $5,000 of the Year 2 loss remains unrecaptured. The $80,000 gain is recaptured as ordinary income to the extent of the $5,000 remaining Year 2 loss, $20,000 Year 4 loss, and $30,000 Year 5 loss for a total of $55,000. The remaining $25,000 gain is treated as a Sec. 1231 gain.

Question 15

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

1.

Answer 15

1. Form 4562
2. Mid-Year convention: personalty
3. Mid-month convention: realty
4. Mid-quater convention: all personalty (instead of the midyear convention) if more than 40% of personalty acquired during the year is purchased in the last quarter of the year.

Question 16

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

Section 179 Election—There is a Section 179 election to expense a limited amount of tangible personalty if used in a trade activity. It is not available for income-producing property (i.e., rental property) or real property (i.e., real estate). (before bonus depreciation)

Answer 16

1. The maximum amount expensed in any year is limited to the lesser of business income or $1,020,000 for 2019 ($1,000,000 for 2018).
2. The Section 179 expense cannot exceed the income from the business, reduced for all expenses except Section 179. Any election to expense in excess of the business income limit is carried forward (indefinitely) and used in a year when income is sufficient.
3. The Section 179 election is phased out (dollar for dollar) if qualified assets purchased exceed $2,550,000 for 2019 ($2,500,000 for 2018).
4. A carryforward is not allowed if the Section 179 deduction is reduced due to the excess purchase provision.
5. The taxpayer can revoke the Section 179 election in later years as long as the return is still eligible to be amended.
6. If property for which Section 179 has been collected is converted to nonbusiness use, the Section 179 and MACRS deductions claimed in excess of what would have been allowed if Section 179 had not been elected must be recaptured as income.

Question 17

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

Bonus depreciation

Answer 17

1. Bonus depreciation of 100% is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.
2. Qualifying property is new and used tangible property with a recovery period of less than or equal to 20 years, computer software, and qualified improvement property.
3. Qualified improvement property is improvements to the interior of nonresidential property that is made after the building is placed in service.

Question 18

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

Luxury Auto Limits—Autos are subject to an annual ceiling on recovery.

Answer 18

1. Special rules limit the amount of depreciation that can be claimed on a passenger automobile (GVW of 6,000 pounds or less). However, these limits are adjusted annually for inflation, so the exact dollar limits do not need to be memorized for the exam. For 2018, (the 2019 inflation-adjusted amount was not available at time of publication) first-year depreciation is limited to $10,000 for automobiles, trucks, and vans. If bonus depreciated is elected, these amounts are increased in 2018 by $8,000 to $18,000. The statutory amounts allowed after the first year are indexed for inflation and would be given to you on the exam.
2. Trucks, vans, and SUVs (and any other vehicle) that weigh more than 6,000 pounds are exempt from the luxury automobile rule. However, for these heavier vehicles, the Section 179 election is limited to $25,500 (assuming 100% business use). Regular MACRS rules apply for the remaining basis.

Question 19

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

Depletion

Answer 19

Example

Land cost $10,050,000 of which $50,000 is the residual value of the land. There are 1,000,000 barrels of oil recoverable. If 10,000 barrels were sold, cost depletion would be ($10,000,000 / 1,000,000 barrels) × 10,000 = $100,000.

Question 20

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

As part of a business acquisition, on January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?

1. 5 years
2. 7 years
3. 15 years
4. 17 years

Answer 20

3.

The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

Question 21

III. Federal Taxation of Property Transactions

75. Section 1231 Assets—Cost Recovery

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?

1. $3,000
2. $6,000
3. $8,000
4. $16,000

Answer 21

3.

Correct! Customer lists, trade names, and goodwill are intangible assets that are amortized over 180 months. For the current year the assets are amortized for six months since the business began July 1. ($240,000/180 months × 6 months = $8,000).

Question 22

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

I. Like-Kind Exchanges

Answer 22

1. Losses are never recognized
2. Recognized gain is the lesser of:
   
   1. Realized gain; or
   2. Boot received.

Property given up by Joan Reed:

• Fair value  $500,000
• Adjusted basis  $300,000

​Property received by Joan Reed:

• Fair value$450,000

Plus cash of 50,000

1. Recognized gain is the lesser of (1) realized gain of $200,000 or (2) boot received ($50,000).
2. Realized gain: $500,000 fair value of property received ($450,000 + Boot received of $50,000) – $300,000 (adjusted basis of property given up) equals $200,000. The deferred gain is $150,000.

Question 23

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

I. Like-Kind Exchanges

Basis of like-kind property received

Answer 23

1. Formula 1

FMV of property received

– Postponed gain

+ Postponed loss

Basis of like-kind property received

2. Formula 2

Adjusted basis of property given away

+ Gain recognized

+ Boot given (cash paid; debt assumed)

– Boot received (cash received; debt relief)

Basis of like-kind property received

Question 24

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

I. Like-Kind Exchanges

Basis of like-kind property received

Example

Question: Leker exchanged land that was used exclusively for business and had an adjusted tax basis of $20,000 for different land. The new land had an FMV of $10,000, and Leker also received $3,000 in cash. What was Leker’s tax basis in the acquired land?

Answer 24

Answer: Leker has a realized loss on this exchange of $7,000 ($13,000 amount realized—$20,000 adjusted basis). He received $3,000 of boot, but boot does not cause realized losses to be recognized. Therefore, the recognized loss is zero and the postponed loss is $7,000. Leker’s basis in the acquired land is its FMV ($10,000) plus the postponed loss ($7,000), or $17,000.

Question 25

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

III. Involuntary Conversions

Answer 25

• Note that while the deferral rules for like-kind exchanges are mandatory, the rules for involuntary conversions are elective.
• Also, gains and losses are deferred under the like-kind exchange rules, while only gains are deferred for involuntary conversions.

Question 26

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

III. Involuntary Conversions

7. Defer gain

Answer 26

1. Replacement property
   
   1. The replacement property must be similar or related in the service or use made by the taxpayer.
2. Replacement time period
   
   1. The replacement must be made within two years from the end of the tax year in which the gain is realized.
   2. The replacement period is extended to three years if the conversion was a condemnation of business realty. The replacement period can also be extended with IRS permission, or if the area of the conversion is declared a disaster area.
   3. If property is not replaced within the time limit, an amended return is filed to recognize gain in the year realized.

Question 27

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

A taxpayer has land with a tax basis of $10,000 and a fair value (FV) of $13,000 that is exchanged for land having a FV of $12,000. The taxpayer also receives $1,000 cash.

What is the tax effect to this taxpayer?

Answer 27

Because this is a like-kind exchange where cash is also received, the taxpayer is taxed on the lesser of the boot received (cash of $1,000) or the realized gain. The realized gain is the value received ($13,000 or $12,000 plus $1,000) in excess of the tax basis surrendered ($10,000). Thus, the realized gain is $3,000. Because the boot received was less, the $1,000 is the taxable (recognized) gain to the taxpayer.

The $2,000 remaining realized gain is postponed gain and is used to reduce the adjusted basis of the land received to $10,000 ($12,000 − $2,000).

Question 28

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

Dawson Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson’s basis in the new warehouse?

1. $47,000
2. $75,000
3. $139,000
4. $167,000

Answer 28

A fire qualifies as an involuntary conversion, and realized gain can be deferred since the old warehouse is replaced with a new warehouse.

Amount realized from conversion $195,000

Adjusted basis of old property (75,000)

Realized gain $120,000

Amount realized from conversion $195,000

Cost of replacement property (167,000)

$ 28,000

The recognized gain is $28,000, the lower of the realized gain or the amount realized that was not reinvested in the new warehouse. The deferred gain is $92,000 ($120,000 – $28,000).

The adjusted basis of the new property is its cost reduced by any deferred gain: $167,000 - $92,000 = $75,000.

Question 29

III. Federal Taxation of Property Transactions

76. Like-Kind Exchanges and Involuntary Conversions

A taxpayer owned a rental home with an $85,000 fair market value, a $70,000 adjusted basis, and a $60,000 mortgage. The taxpayer exchanged the home for $12,000 in cash plus a rental property with a $65,000 fair market value and a $52,000 mortgage. What amount of gain, if any, must be recognized by the taxpayer on the exchange?

1. $0
2. $8,000
3. $12,000
4. $15,000

Answer 29

This is a qualified like-kind exchange because the property is realty.

Amount Realized:

New rental property $65,000

Cash 12,000

Debt relief 60,000

Debt assumed (52,000)

$85,000

Adjusted basis (70,000)

Realized gain $15,000

Boot received ($20,000) is cash received ($12,000) plus net debt relief ($8,000 ($60,000 – $52,000)).

Gain must be recognized equal to the lower of the realized gain ($15,000) or boot received ($20,000).

Recognized gain is $15,000.

Question 30

III. Federal Taxation of Property Transactions

77. Other Nonrecognition Transactions
78. Wash Sales—Losses from the sale of securities are not recognized if similar securities are purchased within 30 days of the sale.
79. Related Parties
    Dad—->Son—->3rd Party
    Loss {Loss: cannot be added, Gain: reducing gain)
80. Short Sale

Answer 30

• TP sold 100 shares of XYZ stock on December 22 for $1,200. The stock had an adjusted basis of $2,000, and TP realized a loss of $800. If TP purchased 100 shares of XYZ on January 15 of the next year for $1,400, the loss on the December 22 sale would be deferred as a wash sale. The stock held by TP would have a basis of $2,200 ($1,400 plus $800).
• The “repurchase” of a security can occur either before or after sale of the original security—the 30-day period is a window centered on the sale date. The repurchase period is 61 days, the day of sale plus 30 days before and after this day.

Question 31

III. Federal Taxation of Property Transactions

77. Other Nonrecognition Transactions

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sands’s recognized gain or loss?

1. $0
2. $500 loss
3. $1,000 loss
4. $2,000 loss

Answer 31

3.

Sand’s basis per share is $180 ($18,000/100 shares). Sand’s realized loss on the 50 shares sold is $2,000 ($7,000 amount realized – $9,000 basis ($180 × 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

Question 32

III. Federal Taxation of Property Transactions

77. Other Nonrecognition Transactions

Ryan, age 57, is single with no dependents. In 2019, Ryan’s principal residence was sold for the net amount of $400,000 after all selling expenses.

Ryan bought the house in 2002 and occupied it until it was sold. On the date of sale, the house had a basis of $180,000. Ryan does not intend to buy another residence.

What is the maximum exclusion of gain on sale of the residence that may be claimed on Ryan’s 2019 income tax return?

1. $500,000
2. $220,000
3. $125,000
4. $0

Answer 32

2.

The realized gain is $220,000 ($400,000 − $180,000). Taxpayers may exclude up to $250,000 ($500,000 for married filing jointly if both qualify) from the sale of his/her principal residence. To qualify for the exclusion, the taxpayer must own and use the residence as his/her principal residence for two of the 5 years preceding the sale of the residence. Once a taxpayer has made this election, he/she is not eligible to make the election again for two years. The entire $220,000 gain is excluded.