During 2014, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker's commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain?

Question

Quizplus · Accepted Answer

The recognized gain is calculated as follows:
Sales Price - Basis - Selling Expenses - Cost of Improvements = Gain or Loss

$880,000 - $300,000 - $53,000 - $6,000 = $521,000

However, since Ted and Judy are both over 55 years old and have owned and lived in the home for at least 2 out of the past 5 years, they qualify for the home sale exclusion. The exclusion allows them to exclude up to $500,000 of the gain from the sale of their primary residence ($250,000 each). Therefore, the recognized gain is reduced to $21,000 ($521,000 - $500,000).

The answer is not A because there is a recognized gain due to the cost of improvements and selling expenses. The answer is not B because the recognized gain is actually $21,000 after taking into account the home sale exclusion. The answer is not D because the recognized gain is only $21,000, not $527,000.

During 2014, Ted and Judy, a Married Couple, Decided to Sell