Lenny and Beverly have been married and living together in Lenny's home for 6 years. He lived in the home alone for 20 years prior to their marriage. They sell the home, which has an adjusted basis of $120,000, for $700,000. Lenny and Beverly plan to use the § 121 exclusion (exclusion of gain on sale of principal residence). In Beverly's prior marriage to Dan, Dan sold his principal residence and used the § 121 exclusion. Beverly and Dan filed joint returns during their seven years of marriage. They had lived in Dan's house throughout their marriage. Dan's sale had occurred one year prior to the divorce. Lenny and Beverly purchase a replacement residence for $650,000 one month after the sale. What is the recognized gain and basis for the new home?
A) $0? $80,000.
B) $80,000? $150,000.
C) $80,000? $650,000.
D) $330,000? $650,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Lenny and Beverly can exclude up to $500,000 of gain under § 121 because they meet the ownership and use tests. The gain on the sale is $580,000 ($700,000 - $120,000). After the exclusion, the recognized gain is $80,000 ($580,000 - $500,000). The basis for the new home is the purchase price of $650,000.

Lenny and Beverly Have Been Married and Living Together in Lenny's