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Exclusion for home sales under Sec 121

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It has been a busy day. Three new clients have dropped off their tax information.

Ann has just moved to California from Tennessee. You notice that she sold her home in Tennessee eight months after moving to California. She had owned the home for a little over three years. She rented the home after moving. Originally, she had planned to keep the home and rent it forever. Once she got over the sticker shock of California real estate she sold the home so she could afford to purchase a new home in California.

Michelle has just moved to California from Maine. She sold her home and relocated after the company she worked for closed their chilly office in Maine and opened a new office on the beach in sunny California. She lived in the home for 18 months before relocating and sold it three months after moving. The home was vacant after she moved. She has not purchased a new home but plans to soon.

Gayle has just moved to California from Nevada. It seems that in the short time that she lived in Nevada she had developed an unhealthy affinity to the blackjack table. She owned a home in Nevada for six months before selling it and moving. She will not purchase a new home for at least several years (until after the casinos are paid off).

Assume that the gain on the sale of each home is $500,000. Discuss the proper tax treatment on the sale of each home. How much, if any, of the gain is taxable? Why? Please clearly state in assumptions that you make.

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Solution Summary

The solution explains the exclusion amount for three scenarios.

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Ann can temporarily rent out the TN home without losing her exclusion under Sec 121. She passed the 2 out of 5 year rule and can exclude $250,000 of gain as a single person. She will report and pay tax on the remaining ...

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