William and Kate married in 2013 and purchased a new home together.Each had owned and lived in separate residences for the past 5 years.William's adjusted basis in his old residence was $200,000; Kate's adjusted basis in her old residence was $120,000.In late 2013,William sells his residence for $500,000 while Kate sells her residence for $190,000.What is the total gain to be excluded from these transactions in 2013?

Question

Quizplus · Accepted Answer

To calculate the gain that can be excluded from the sale of their residences, we need to use the rules for the exclusion of gain from the sale of a principal residence.

First, we calculate the gain on the sale of each residence:
- William's gain: Sales price $500,000 - Adjusted basis $200,000 = $300,000 gain
- Kate's gain: Sales price $190,000 - Adjusted basis $120,000 = $70,000 gain

Next, we check if each of them meets the ownership and use tests for the exclusion of gain:
- Ownership test: they both owned and used their residences as their principal residence for at least 2 out of the 5 years before the sale.
- Use test: they both lived in their respective residences for at least 2 out of the 5 years before the sale.

Therefore, they can each exclude up to $250,000 of gain ($500,000 for a married couple filing jointly) from the sale of their principal residence, if they meet the requirements. 
- William can exclude $250,000 of his $300,000 gain, leaving $50,000 to be taxed.
- Kate can exclude $70,000 of her gain, leaving no taxable gain.

The total gain to be excluded is therefore $250,000 + $250,000 = $500,000. However, since William has some taxable gain, the correct answer is $500,000 - $50,000 = $450,000. 
Therefore, the closest answer choice is C) $320,000.

William and Kate Married in 2013 and Purchased a New