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    Sale of Home Rules

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    1. Amos sells his principal residence, which has an adjusted basis of $100,000 for $150,000. He incurs selling expenses and legal fees of $6,000. He had purchased another residence one month prior to the sale for
    $140,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?
    a. $0 and $100,000.
    b. $0 and $140,000.
    c. $44,000 and $100,000.
    d. $44,000 and $140,000.
    e. None of the above.

    2. Eric and Faye, who are married, jointly own a house in which they have resided for the past 17 years. They sell the house for $375,000 with realtor's fees of $10,000. Their adjusted basis for the house is $80,000. Since they are in their retirement years, they plan on moving around the country and renting. What is their recognized gain on the sale of the residence if they use the § 121 exclusion (exclusion of gain on sale of
    principal residence) and if they elect to forgo the § 121 exclusion?
    With exclusion Elect to forgo
    a. $0 $0
    b. $35,000 $35,000
    c. $0 $285,000
    d. $35,000 $285,000
    e. $285,000 $225,000

    3. Tony and Janice have been married and living together in Tony's home for 5 years. He lived in the home alone for 20 years prior to their marriage. They sell the home, which has an adjusted basis of $80,000, for
    $450,000. Tony and Janice plan to use the § 121 exclusion (exclusion of gain on sale of principal residence). In Janice's prior marriage to Dan, Dan sold his principal residence and used the § 121 exclusion. Janice and Dan filed joint returns during their years of marriage. Tony and Janice purchase a replacement residence for $200,000 one month after the sale. What is the recognized gain and basis for the new home?
    a. $0; $80,000.
    b. $0; $200,000.
    c. $120,000; $200,000.
    d. $370,000; $200,000.
    e. None of the above.

    4. Which of the following is a capital asset?
    a. The bicycle of a 10-year old child. The child purchased the bicycle with money inherited from an aunt.
    b. The tools used by a self-employed carpenter.
    c. The lots owned by a company that is in the business of buying and reselling residential building lots.
    d. A "mint" set of 1985 coins owned by a coin dealer and that is for sale on his website.
    e. None of the above.

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    Solution Preview

    1. For Amos, the gain is calculated by subtracting the basis from the amount realized. The amount realized is the sales price minus the selling expenses and legal fees. *** For a more complete listing of selling expenses see West Federal Taxation copyrighted 2007, 15:18. In this example $150,000 selling price minus $6,000 in fees for an amount realized of $144,000, then the basis is subtracted yielding: $144,000 - $100,000 for a gain of $44,000. Previously the only break on the gain of sale of a residence was to defer the gain, it is not ...

    Solution Summary

    This solution covers the topics of sale of principal residence and capital asset definition.