Tax 4-4 Analyze a situation involving a disposition of a personal residence to calculate the gain or loss realized and the gain or loss recognized. Flashcards
Personal Residence Gain or Loss Calculation
Two computations are necessary when dealing with the Section 121 exclusion: the gain realized and the gain recognized.
The gain _____ is the difference between the amount received and the adjusted basis of the residence.
realized or recognized
(4-4, 34)
realized
Personal Residence Gain or Loss Calculation
Two computations are necessary when dealing with the Section 121 exclusion: the gain realized and the gain recognized.
The gain _____ is the amount subject to income tax.
realized or recognized
(4-4, 34)
recognized
It is the gain realized reduced by the allowable Section 121 exclusion amount.
Subject to taxation as a long-term capital gain.
Personal Residence Gain or Loss Calculation
Assume that, in March of the current year, Susan sells her principal residence for a total price of $430,000; $380,000 is cash with the buyer assuming a $50,000 mortgage on the house. Susan purchased the house many years ago for $350,000. However, the old Section 1034 rollover provision applied, so her adjusted basis is only $100,000. Real estate agent commissions of $24,000 resulted from the sale.
Calculate the gain realized:
(4-4, 35)
$380,000 Cash \+ $50,000 Mortgage assumed by buyer - $24,000 Selling expenses = $406,000 Total amount realized - $100,000 Less adjusted basis = $306,000 Gain realized
The gain realized is $306,000. However, a portion of that gain may be excluded under Section 121 (so you need to determine the amount recognized)
Personal Residence Gain or Loss Calculation
Assume that, in March of the current year, Susan sells her principal residence for a total price of $430,000; $380,000 is cash with the buyer assuming a $50,000 mortgage on the house. Susan purchased the house many years ago for $350,000. However, the old Section 1034 rollover provision applied, so her adjusted basis is only $100,000. Real estate agent commissions of $24,000 resulted from the sale.
The gain realized is $306,000.
Calculate the gain recognized:
(4-4, 34)
$306,000 Gain realized
- $250,000 Less single exclusion
= $56,000 Gain recognized
Thus, $250,000 is excluded under Section 121, leaving $56,000 that is subject to taxation as a long-term capital gain.
Personal Residence Gain or Loss Calculation
Module Check
- In January of 1995, Jim Johnson, then age 57, sold his principal residence in Seattle and took advantage of the once-in-a-lifetime exclusion available under Section 121. At that time, the maximum exclusion was $125,000. He excluded his entire gain on the sale, which was $100,000. Later that year, he purchased a new residence in Denver that he used as his principal residence. Early in the current year, he sold the Denver residence for a realized gain of $300,000. What is the maximum amount of gain, if any, that Jim may exclude under Section 121?
$0
$25,000
$250,000
(LO 4-4)
$250,000
Use of the once-in-a-lifetime exclusion prior to May 7, 1997, does not preclude use of the full Section 121 exclusion for sales after that date. A single taxpayer may exclude up to $250,000. The remaining $50,000 of gain must be recognized.
Personal Residence Gain or Loss Calculation
Module Check
- Mary Falcon is a single taxpayer. On January 1, 2016, she received a gift from her mother of a house that immediately became her principal residence. On January 1, 2017, she sold this home for a realized gain of $133,000. She sold the home because she received a job promotion and was transferred to a new location out of state. What is the maximum amount of gain, if any, that may be excluded under Section 121?
$0
$66,500
$125,000
$133,000
(LO 4-4)
$125,000
An exception to the general rule is available for a taxpayer who fails to use the residence for the required two-year period because of a job-related move. A pro rata exclusion, based on the full $250,000 exclusion multiplied by the percentage of the required time period that was completed, is available. In this situation, the full exclusion of $250,000 multiplied by 50% (one year of use divided by the two years of required use) results in a maximum exclusion of $125,000.
Personal Residence Gain or Loss Calculation
Module Check
- Carol, a single taxpayer, sold her home in March of the current tax year for $380,000. She had lived in the home as her principal residence for 14 years. She paid a broker’s commission of $20,000. The cost, and basis, of the former home was $60,000. What is the amount of gain recognized by Carol on the sale?
$50,000
$70,000
$300,000
(LO 4-4)
$50,000
$380,000 Sale Price/Cash \+ $0 Mortgage Assumed by Buyer - $20,000 Selling Expenses/Commission = $360,000 Total Amount Realized - $60,000 Adjusted Basis = $300,000 Gain Realized - $250,000 Section 121 Exclusion = $50,000 Gain Recognized
Personal Residence Gain or Loss Calculation
Vernon Green, a married taxpayer filing a joint return, sold his home in January of the current tax year for $490,000; he paid a broker’s commission of $29,500. Vernon and his spouse owned and used the property as a principal residence for the last eight years. The cost of the home was $335,000, and his basis in it was $243,000.
Calculate the gain or loss realized and the gain or loss recognized.
(LO 4-4, pg 67 of text)
$490,000 Sale Price/Cash \+ $0 Mortgage Assumed by Buyer - $29,500 Selling Expenses/Commission = $460,500 Total Amount Realized - $243,000 Adjusted Basis = $217,500 Gain Realized - $250,000 Section 121 Exclusion = -$32,500 Gain Recognized (if negative, no taxable gain)
As a result of the Section 121 exclusion, there is no gain recognized, and no tax due from the sale.
Personal Residence Gain or Loss Calculation
Gladys Freund, age 45, has owned and lived in her home for 10 years. She paid $100,000 for the house 10 years ago and recently had the house appraised for $375,000. She has not made any improvements since she purchased the house. She plans to sell her present residence in July of the current tax year and purchase a new home for $250,000. Upon the sale of her present home, she will incur a broker’s commission of $9,000.
Calculate the gain or loss realized and the gain or loss recognized.
(LO 4-4, pg 68 of text)
$375,000 Sale Price/Cash \+ $0 Mortgage Assumed by Buyer - $9,000 Selling Expenses/Commission = $366,000 Total Amount Realized - $100,000 Adjusted Basis = $266,000 Gain Realized - $250,000 Section 121 Exclusion = $16,000 Gain Recognized
Gladys will pay tax on only $16,000 as a result of the Section 121 exclusion. The purchase of the new residence does not affect the Section 121 exclusion.
Personal Residence Gain or Loss Calculation
What is the maximum exclusion amount for a single taxpayer who occupies a principal residence for 18 months, and sells the residence due to an out-of-state job transfer?
(LO 4-4, pg 68 of text)
The maximum exclusion is 18/24 of $250,000, or $187,500.
Practice Test 2
Personal Residence Gain or Loss Calculation
- In March of the current year, Susan Sharp sold her principal residence for a total price of $450,000—$300,000 cash, with the buyer assuming a $150,000 mortgage on the house. Susan purchased the house 15 years ago for $80,000. She has not made any improvements to the house. Real estate commissions of $27,500 resulted from the sale. Sixteen months later, Susan bought a new residence for $105,000.
What amount, if any, must be recognized on the sale of Susan Sharp’s residence?
$0
$92,500
$120,000
$342,500
(LO 4-4, pg 68 of text)
$92,500
$300,000 Sale Price/Cash \+ $150,000 Mortgage Assumed by Buyer - $27,500 Selling Expenses/Commission = $422,500 Total Amount Realized - $80,000 Adjusted Basis = $342,500 Gain Realized - $250,000 Section 121 Exclusion = $92,500 Gain Recognized
The purchase of the new residence is not relevant to the Section 121 exclusion. If there had been a loss on the sale of the principal residence, it would not be deductible. The loss on a personal-use asset is nondeductible.
Practice Test 2
Personal Residence Gain or Loss Calculation
- In June of the current year, Mindy Proctor sold her principal residence for a total price of $185,000—she received $100,000 in cash and the buyer assumed an $85,000 mortgage on the house. Mindy purchased the house six years ago for $120,000 and has made $80,000 in improvements to the house. Real estate commissions of $9,200 resulted from the sale.
What amount of gain or loss, if any, must be recognized on the sale of Mindy’s residence?
($24,000)
($15,000)
$0
$35,800
4-4
$0
$100,000 Sale Price/Cash \+ $85,000 Mortgage Assumed by Buyer - $9,200 Selling Expenses/Commission = $175,800 Total Amount Realized - $200,000 Adjusted Basis = -$24,200 Loss Realized
If a loss is realized on the sale of a principlal residence, it is not deductible (recognized).
Practice Test 1
- In January of 1992, Jim Johnson, then age 57, sold his principal residence in Seattle and took advantage of the once-in-a-lifetime exclusion available under Section 121. At that time, the maximum exclusion was $125,000. He excluded his entire gain on the sale, which was $100,000. Later that year, he purchased a new residence in Denver that he used as his principal residence. Earlier this year, he sold the Denver residence for a realized gain of $200,000.
What is the maximum amount of gain, if any, that Jim may exclude under Section 121?
$0
$25,000
$175,000
$200,000
(LO 4-4)
$200,000
Use of the once-in-a-lifetime exclusion prior to May 7, 1997, does not preclude use of the full Section 121 exclusion for sales after that date. Thus, Jim may exclude the entire gain of $200,000. His gain recognized would be $0.
- On June 1, 2014, Hugh and Judy MacFarland, both age 45, moved into a new house that they had custom built at a cost of $524,000. Because of a slow real estate market in their area, Hugh and Judy were unable to sell their previous home until January 1, 2016. Their previous home, which they had lived in for 15 years, sold for a price of $916,000. Their basis in their old home was $312,000.
How much gain, if any, must Hugh and Judy recognize for tax purposes as a result of this sale?
$0
$92,000
$104,000
$604,000
(LO 4-4)
$104,000
$916,000 Sale Price/Cash \+ $0 Mortgage Assumed by Buyer - $0 Selling Expenses/Commission = $916,000 Total Amount Realized - $312,000 Adjusted Basis = $604,000 Gain Realized - $500,000 Section 121 Exclusion = $104,000 Gain Recognized
They have lived in the new home for only 19 months before the old home sold. Thus, for the previous home, they meet the two out of five year rule allowing for up to a $500,000 exclusion of gain on the sale of a principal residence under Section 121.
