Ethan (single) purchased his home on July 1, 2005. On July 1, 2012 he moved out of the home. He rented the home until July 1, 2014 when he moved back into the home. On July 1, 2015 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2015 gross income?

Question

Quizplus · Accepted Answer

According to the IRS, to qualify for the home sale exclusion, the taxpayer must have owned and used the home as the taxpayer's main home for at least two years out of the five years before the date of sale. In this case, Ethan owned the home for seven years, but only used it as his main home for the first seven years and the last year, for a total of 8 years. Therefore, he meets the ownership requirement.

However, he only used the home as his main home for two out of the five years before the sale, which means he does not meet the use requirement. As a result, he is not eligible for the full $250,000/$500,000 exclusion, but he can still exclude a portion of the gain that is attributable to the time he lived in the home.

To determine the portion of the gain that can be excluded, we need to calculate the fraction of time that Ethan used the home as his main home. In this case, he used the home as his main home for 2 out of 8 years, or 25%. Therefore, he can exclude 25% of the $210,000 gain, which is $52,500. That leaves $157,500 ($210,000 - $52,500) that he must include in his 2015 gross income.

Therefore, the best choice is B, $168,000, because that is the closest option to the amount that he can exclude.

Ethan (Single) Purchased His Home on July 1, 2005