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Transactions under Section 121, Sale of personal residences

Meg and Walt are going to be married in three months. Meg has owned and lived in her home for 42 years, and Walt has owned and occupied his home for 35 years. They both have listed their homes for sale. They anticipate the sales results will be as follows:

Meg's
*Selling price $450K
*Selling expenses $40K
*Adjusted basis $75K

Walt's
*Selling price $190K
*Selling expenses $19K
*Adjusted basis $60K

They intend to purchase a residence in an extended care facility for $400K. They have come to you for advice regarding the following:

a. What is their recognized gain if they marry before they sell their residences?

b. What is their recognized gain if they marry after they sell their residences?

c. Walt would prefer to invest his sales proceeds in the stock market. Does it matter whether the new residence is jointly owned or owned only by Meg?

d. Should Meg and Walt delay their marriage if they have not yet sold their residences?

Solution Preview

The gain:

Meg's gain = 450 - 40 - 75 = $335K
Walt's gain = 190 - 19 - 60 = $111K

The rules:

Under Sec 121, the two rules to be satisfied in order to take the exclusion are ownership and use. Individually, both Med and Walt meet the ownership and use criteria. The maximum exclusion of $250,000 would be allowable for each of them. Therefore Meg would have to report $85,000 of gain on the sale of her property. Walt is covered by the exclusion.

If married ...

Solution Summary

The solution calculates the potential gain for each taxpayer, and then states the applicable tax law for the circumstances in the problem. Following the rules, the questions are answered including a reference to the law as it applies.

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