During 2019, Sam and Libby, a married couple, decided to sell their residence, which had a basis of $200,000.They had owned and occupied the residence for 20 years.To make it more attractive to prospective buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately.They sold the house in May for $800,000.Broker's commissions and other selling expenses amounted to $50,000.They purchased a new residence in July for $400,000.What is the recognized gain and the adjusted basis of the new residence?

Question

Quizplus · Accepted Answer

The recognized gain is calculated by subtracting the adjusted basis of the old residence and the selling expenses from the selling price. The adjusted basis of the old residence is $200,000 (initial basis) + $5,000 (improvement costs) = $205,000. The selling price is $800,000, and the selling expenses are $50,000, so the amount realized from the sale is $800,000 - $50,000 = $750,000. The recognized gain is $750,000 - $205,000 = $545,000. However, under the Section 121 exclusion, if you have owned and used the residence as your principal residence for at least 2 out of the last 5 years, you can exclude up to $500,000 of the gain if you're married filing jointly. Therefore, the recognized gain is $545,000 - $500,000 = $45,000. The adjusted basis of the new residence is simply its purchase price, $400,000, as the question does not provide information about additional improvements or adjustments.

During 2019, Sam and Libby, a Married Couple, Decided to Sell