Q, who is 62 years of age, sold her principal residence for $340,000 and elected to exclude the maximum amount under § 121 for an unmarried person.The residence cost $85,000 several years ago.Selling costs of $3,000 were incurred.If Q purchases a replacement residence within two years for $120,000, how much gain must she recognize and what is her basis in the replacement home, respectively?

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Under § 121, an individual can exclude up to $250,000 of gain from the sale of a principal residence. Q's gain on the sale is calculated as the selling price ($340,000) minus the cost basis ($85,000) and selling costs ($3,000), which equals $252,000. After excluding the maximum amount of $250,000, Q must recognize $2,000 of gain. The purchase of a replacement residence does not affect the gain recognition under § 121, nor does it affect the basis of the new property, which is $120,000.

Q, Who Is 62 Years of Age, Sold Her Principal