On February 1, 2012, Alan, a single individual, purchased his first personal residence for $400,000. On July 1, 2012, Alan sold this residence for $460,000 because he accepted a new job in another state. Consequently, Alan occupied the home for only 150 days. How much gain must Alan recognize?

Question

Quizplus · Accepted Answer

To calculate the gain, we need to find the adjusted basis of the property. Since Alan only lived in the property for 150 days, he can allocate 150/365 of the acquisition cost towards his personal residence. The remaining 215/365 of the cost will be allocated towards the time the property was used as a rental.
Adjusted basis for the personal residence = $400,000 x (150/365) = $165,753.42
Adjusted basis for the rental period = $400,000 x (215/365) = $234,246.58
Since Alan sold the property for $460,000, his gross profit is $460,000 - $234,246.58 = $225,753.42
However, since he only lived in it for 150 days, he is not eligible for the full $250,000 ($500,000 if married filing jointly) exclusion on the gain from the sale of a personal residence. Instead, he is eligible to exclude a prorated amount, which is calculated as follows: 
Prorated exclusion = $250,000 x (150/730) = $51,370. 
Thus, Alan must recognize a gain of $225,753.42 - $51,370 = $174,383.42. The correct answer is, therefore, B.

On February 1, 2012, Alan, a Single Individual, Purchased His