Question 1

Lana owned a house used as a rental property for three years. During this rental period, she took $60,000 of depreciation deductions. Lana moved into the house and has used it as her principal residence for the past two years. Lana has just sold the house and realized a $200,000 gain. She will recognize gain of
A) $0.
B) $60,000.
C) $200,000.
D) $144,000.

Accepted Answer

Since Lana used the house as a rental property for three years and took $60,000 of depreciation deductions, she must recapture the depreciation as ordinary income upon the sale of the property. The recapture amount is $60,000. Additionally, since Lana has used the house as her principal residence for two years, she can exclude up to $250,000 ($500,000 if married filing jointly) of the gain from the sale of the property. However, since she realized a gain of $200,000, she wouldn't be able to exclude the entire gain. Therefore, the taxable gain would be $200,000 - $60,000 (recapture of depreciation) - $0 (exclusion amount) = $140,000. The recognized gain would be $144,000 ($140,000 taxable gain + $4,000 recapture of depreciation).

Question 2

In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs. What is the adjusted basis of the home?

Accepted Answer

The answer of In 1997, Paige paid $200,000 to purchase...

Question 3

All of the following statements are true with regard to personal residences except:
A) Temporarily renting property that was formerly the taxpayer's principal residence does not automatically preclude the use of Sec. 121.
B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer's principal residence or a secondary residence.
C) In the case of married taxpayers, an individual may claim the exclusion even if the individual's spouse used the exclusion within the past two years.
D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.

Accepted Answer

B)Only the principal residence qualifies for the exclusion.

Question 4

Hannah, a single taxpayer, sold her primary residence on January 1, 2016. Her total realized gain is $210,000. The house was acquired on January 1, 2006 and rented to tenants until December 31, 2012. Hannah moved in on January 1, 2013 and used the house as her principal residence until the sale. During the rental period, $30,000 of depreciation was deducted. Due to the sale of the house in 2016, Hannah will recognize a gain of
A) $210,000.
B) $30,000.
C) $72,000.
D) $102,000.

Accepted Answer

To calculate the gain on the sale of a primary residence, we need to determine the total realized gain and the adjusted basis. The total realized gain is the amount for which the property sold minus the adjusted basis, which is the original cost of the property plus any improvements and minus any depreciation taken.

In this case, Hannah's total realized gain is $210,000. To calculate the adjusted basis, we need to take into account the fact that the property was rented and later used as a primary residence.

The adjusted basis is calculated as follows:

Original cost: not given
+ Improvements: not given
- Depreciation taken: $30,000
= Adjusted basis

Since we don't have information on the original cost or any improvements, we can only subtract the $30,000 of depreciation that was taken during the rental period. This gives us an adjusted basis of $0 (since the depreciation taken was greater than the original cost).

Therefore, the gain recognized on the sale of the property is $210,000 (total realized gain) - $0 (adjusted basis) = $210,000.

However, because Hannah lived in the property as her primary residence for at least two of the last five years before the sale, she may be eligible for the home sale exclusion. As of 2016, the maximum exclusion amount for a single taxpayer was $250,000. If Hannah meets all of the requirements for the exclusion, her taxable gain would be reduced by up to $250,000, resulting in a gain of $0 in this case.

Question 5

James and Ellen Connors, who are both 50 years old and married, sell their personal residence on July 25, 2016 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000. They purchased a new home for $1,000,000 in August 2016. After living in that home for 219 days, the Connors were forced to sell their new home in 2017 for $1,300,000 and move to another climate due to Ellen's severe health problems.
a. What is the amount of gain recognized on the home sale in 2016?
b. What is the amount of the gain recognized on the home sale in 2017?

Accepted Answer

The answer of James and Ellen Connors, who are both...

Question 6

Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Accepted Answer

The answer of Discuss why a taxpayer would want to...

Question 7

Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for $790,000. What is the amount of Amber's recognized gain on the sale of the home?

Accepted Answer

The answer of Amber receives a residence ($750,000 FMV, $500,000...

Question 8

Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home costing approximately $600,000. What should they consider before selling their home?

Accepted Answer

The answer of Ike and Tina married and moved into...

Question 9

The Smiths owned and occupied their principal residence, with an adjusted basis of $250,000, for ten years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six months later, they purchase another residence for $850,000.
a. What is the amount of gain the Smiths must recognize?
b. What is the basis of the new residence?

Accepted Answer

The answer of The Smiths owned and occupied their principal...

Question 10

All of the following conditions would encourage a taxpayer to avoid like-kind exchange treatment on the disposition of an otherwise qualifying asset except
A) expected lower tax rates in the future.
B) the availability of net operating loss carryovers.
C) the disposition of a capital gain asset when the taxpayer has a capital loss carryover.
D) a realized loss on the asset disposed of.

Accepted Answer

The answer of All of the following conditions would encourage...

Question 11

Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home?
A) loss of employment by the qualified individual if the individual is eligible for unemployment compensation
B) natural or man-made disaster resulting in a casualty to the residence
C) birth of one child
D) divorce or legal separation

Accepted Answer

The birth of a child is not considered an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home. The unforeseen circumstances that may qualify for a partial exclusion include the loss of employment, natural or man-made disasters resulting in a casualty to the residence, and divorce or legal separation.

Question 12

Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she purchased ten years ago for $435,000.
a. What is the amount of Nicki's recognized gain on the sale?
b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki's recognized gain on the sale?
c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?

Accepted Answer

The answer of Nicki is single and 46 years old....

Question 13

Nana is a self-employed consultant. For the past five years, she has used an extra bedroom (15% of the house) in her home as a qualifying home office and deducted $9,000 of depreciation expense. This year she sells the house for $740,000. The house cost $500,000. Nana is single. She will recognize gain on the sale of the house of
A) $0.
B) $9,000.
C) $45,000.
D) $249,000.

Accepted Answer

The answer of Nana is a self-employed consultant. For the...

Question 14

Jenna, who is single, sold her principal residence on December 1, 2015, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2016 that she occupied until July 1, 2016 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2016 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2016?
A) $0
B) $10,000
C) $20,000
D) $40,000

Accepted Answer

In order to qualify for the exclusion under Sec.121, the taxpayer must both own and use the property as their principal residence for at least two out of the five years preceding the sale. In this case, Jenna only used the Pensacola residence as her principal residence for six months before selling it. Therefore, she does not meet the ownership and usage requirements and cannot exclude any of the gain from the sale.

Question 15

William and Kate married in 2016 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. William's adjusted basis in his old residence was $200,000; Kate's adjusted basis in her old residence was $120,000. In late 2016, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2016?
A) $0
B) $250,000
C) $320,000
D) $370,000

Accepted Answer

William's gain on the sale of his old residence is $300,000 ($500,000 sales price minus $200,000 adjusted basis), which is excluded from income since he meets the ownership and use tests. 
Kate's gain on the sale of her old residence is $70,000 (($190,000 sales price minus $120,000 adjusted basis), which is excluded from income since she also meets the ownership and use tests. 
Therefore, the total gain excluded from these transactions in 2016 is $370,000 (William's $300,000 gain + Kate's $70,000 gain).

Question 16

Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use and ownership tests are satisfied?
A) change in employment that meets the requirement for a moving expense deduction
B) increased traffic due to widening of a road
C) birth of one child
D) divorce

Accepted Answer

If a taxpayer sells their home before meeting the use and ownership tests due to a change in employment that qualifies for a moving expense deduction, they may be eligible for a partial exclusion under certain circumstances. The partial exclusion would be prorated based on the amount of time the taxpayer lived in the home as their primary residence. Option B does not qualify as a valid reason, while options C and D are not relevant to the eligibility for the partial exclusion.

Question 17

On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were $20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paid for two weeks prior to the sale of her home. Ingrid's basis in her old home was $180,000. Ingrid's realized gain upon the sale of her first home is
A) $ 0.
B) $40,000.
C) $50,000.
D) $70,000.

Accepted Answer

To calculate Ingrid's realized gain, we need to start with the selling price of $250,000 and subtract the commissions of $20,000 and the cost of painting and repairs of $10,000. That leaves a net proceeds of $220,000. We then subtract Ingrid's basis in her old home of $180,000 to get a realized gain of $40,000. Therefore, the answer is choice C.

Question 18

Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only one sale or exchange every
A) six months.
B) year.
C) two years.
D) five years.

Accepted Answer

According to Sec. 121, a taxpayer can exclude up to $250,000 in gain (or $500,000 for married couples filing jointly) on the sale of a personal residence, provided that the taxpayer has owned and used the residence as a principal residence for at least two out of the five years preceding the sale. The full exclusion can only be applied once every two years.

Question 19

Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions. Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?
A) Expected higher tax rates in the future.
B) Less accelerated depreciation provisions expected in the future.
C) A decline in the value of the asset being disposed of.
D) None of the above.

Accepted Answer

The answer of Sometimes taxpayers should structure a transaction to...

Question 20

Which of the following statements is false with regard to the ownership and use tests under Sec. 121?
A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
C) For purposes of the two-year ownership rule, a taxpayer's period of ownership includes the period during which the taxpayer's deceased spouse owned the residence.
D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the taxpayer's period of owning the property includes the time the residence was owned by the spouse or ex-spouse.

Accepted Answer

The taxpayer is not required to be occupying the residence at the time of the sale in order for Sec. 121 to apply. The other statements are all true.

Quiz 27: Property Transactions: Nontaxable Exchanges

All of the following statements are true with regard to personal residences except:

Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home costing approximately $600,000. What should they consider before selling their home?

All of the following conditions would encourage a taxpayer to avoid like-kind exchange treatment on the disposition of an otherwise qualifying asset except

Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home?

Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use and ownership tests are satisfied?

Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only one sale or exchange every

Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions. Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?

Which of the following statements is false with regard to the ownership and use tests under Sec. 121?