Hannah,a single taxpayer,sold her primary residence on January 1,2019.Her total realized gain is $210,000.The house was acquired on January 1,2009,and rented to tenants until December 31,2015.Hannah moved in on January 1,2016,and used the house as her principal residence until the sale.During the rental period,$30,000 of depreciation was deducted.Due to the sale of the house in 2019,Hannah will recognize a gain of
A)$126,000.
B)$30,000.
C)$156,000.
D)$138,000.

Question

Quizplus · Accepted Answer

To calculate the gain, we need to determine the adjusted basis of the property. The adjusted basis is the original cost of the property plus any improvements made, minus any depreciation taken.

The original cost of the property is not given in the question, so we can't calculate the exact adjusted basis. However, we do know that the property was rented out from 2009 to 2015, during which time $30,000 of depreciation was taken. This means that the adjusted basis at the time Hannah moved in on January 1, 2016, was the original cost plus any improvements made, minus $30,000.

When Hannah moved in on January 1, 2016, the property became her principal residence. As a result, she can exclude up to $250,000 of the gain on the sale from her income (or $500,000 if she is married filing jointly). However, she also needs to account for the depreciation taken during the rental period.

To calculate the gain, we can use the following formula:

Realized gain - Exclusions - Depreciation recapture = Recognized gain

The realized gain is $210,000.

Hannah can exclude up to $250,000 of the gain from her income, since she meets the eligibility requirements as a single taxpayer who owned and used the house as her primary residence for at least two of the five years before the sale.

Since the property was rented out for six years, we need to recapture the depreciation deducted during that time. The depreciation recapture is the lesser of the depreciation taken or the realized gain, so in this case it is $30,000.

Using the formula above, we can calculate the recognized gain:

$210,000 - $250,000 - $30,000 = -$70,000

The negative number means that Hannah has no recognized gain on the sale of her home, so she does not need to pay any tax on the sale. However, she does need to report the sale on her tax return.

Hannah,a Single Taxpayer,sold Her Primary Residence on January 1,2019