Question

- Calculation of Gain Realized. M, single. purchased a residence on May 1, 2004 for $195,000. M lived in the residence from May 1, 2004 to June 1, 2008 when he began renting it. He rented it from June 2, 2008 through November 30, 2012. He once again lived there from December 1, 2012, until it was sold on May 6, 2018. The following information was derived from M's records: Purchase closing costs... Depreciation claimed while the property was rented... Addition of family room (January 2011) Painting of interior (April 2013) $ 1,450 12,250 23,500 4,200 The property sold for $289,000, and M incurred realtor's commissions of $16,340 and other closing costs of $2,300. The depreciation claimed was $12,250. a. How much is M's basis in the residence at the time of the sale? b. How much is M's gain realized on the sale? c. How much is M's gain recognized?

Answer 1

A.

Particulars	Amount	Remarks
Purchase Cost of Home	$195,000
Purchasing Cost	$1,450
Addition of Family Room	$23,500
Painting of Interior	0	This is considered as normal maintenance expenses and not added to cost.
Total Basis	$219,950
Less : Depreciation	$12,250
Net Basis	$207,700

B.

Sales Proceeds	$289,000
Less - Cost of Sales
Commission on Sale	$16,340
Other Cost	$2,300
	$270,360

Realized Gain
Net Sales Proceeds	$270,360
Less - Cost basis	$207,700
	$62,660

C. Recognized Gain

As per IRS Gain on sale of home is exempt upto $250,000. In the given case Profit of $ 62,660 is realized but for tax purpose gain reported will be NIL as its less than 250,000 (which is exempt limit).