Question

[The following information applies to the questions displayed below.] Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $525,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $780,000. (Leave no answer blank. Enter zero if applicable.)

b. Assume the original facts, except that Steve and Stephanie live in the home until January 1 of year 3, when they purchase a new home and rent out the original home. They finally sell the original home on June 30 of year 5 for $780,000. Ignoring any issues relating to depreciation taken on the home while it is being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?

	Recognized gain

d. Assume the original facts, except that Stephanie moves in with Steve on March 1 of year 3 and the couple is married on March 1 of year 4. Under state law, the couple jointly owns Steve’s home beginning on the date they are married. On December 1 of year 3, Stephanie sells her home that she lived in before she moved in with Steve. She excludes the entire $5,000 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?

	Recognized gain

Answer 1

(B) $255,000.

Pratts used the home as principal residence for less than 2 years (February 1 of year 1 to January 1 of year 3) and thereason for leaving wasn’t due to unusual circumstances therefore they don’t qualify for the home sale Hence they must recognize all $255,000(780000-525000)of gain realized on the sale.

(D) $5,000

Steve meets the ownership and use test but Stephanie does not (even though she meets the use test) because she sold her own home on December 1, year 3 and excluded the entire gainon the sale of her home.She is not eligible to claim another exclusion for two years after December 1, year 3.Consequently, Steve qualifies for the $250,000 exclusion (not the $500,000 exclusion because Stephanie does not qualify).Steve (and Stephanie) must recognize $5,000 of the $255,000 gain.

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