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Joe and Jean, a married couple, purchased their primary residence in 1993 for $100,000
Joe and Jean, a married couple, purchased their primary residence in 1993 for $100,000. While they lived there, they made renovations at a cost of $125,000. They lived there until July 1, 2016. On June 15, 2019, the residence was sold for $800,000. From July 1, 2016, until June 15, 2019, the home was unoccupied. Joe and Jean file a joint retum, and they have never excluded a gain from the sale of another home. What is their taxable gain? A. $575,000 B. $75,000 C. $200,000 D. $0
Expert Solution
Adjusted cost basis of residence = Cost of purchase + Cost of any capital improvements
= $100,000 + $125,000
= $225,000
Sale proceeds from sale on June 15,2019 = $800,000
Capital gain = $800,000 - $225,000
= $575,000
As per IRS Publication 523, Section 121 exclusion test, if following eligibility test is met then taxpayer may exclude upto $250,000 from taxable gain ($500,000 for married filing jointly taxpayers):
1. The taxpayer must have owned and lived in the house for at least 2 years in the five years prior to sale. This condition is met as the house was sold on June 15,2019 and the taxpayers lived in the house till July 1,2016.
2. The taxpayers must not have excluded a gain from sale of another home. This condition is also met.
Therefore, out of $575,000 capital gain, $500,000 can be excluded by Joe and Jean since they are filing married filing jointly status.
The taxable gain will,therefore,be $575,000 - $500,000 = $75,000
Therefore,correct option is B. $75,000
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