During 2018, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker's commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain?

Question

Quizplus · Accepted Answer

To calculate the recognized gain, we need to know the adjusted basis and the amount realized.

Adjusted Basis = Original Basis + Capital Improvements - Depreciation - Casualty Loss
= $300,000 + $6,000 - $0 - $0
= $306,000

Amount Realized = Selling Price - Selling Expenses
= $880,000 - $53,000
= $827,000

Therefore, the recognized gain is:
Recognized Gain = Amount Realized - Adjusted Basis
= $827,000 - $306,000
= $521,000

However, since Ted and Judy are both over 65 years old and the property was their primary residence for at least 2 of the past 5 years, they are eligible for the home sale exclusion. The home sale exclusion allows them to exclude up to $500,000 of gain from the sale of their primary residence.

In this case, the recognized gain is less than the maximum exclusion, so the recognized gain is reduced to $27,000 ($521,000 - $500,000). Therefore, the answer is C.

During 2018, Ted and Judy, a Married Couple, Decided to Sell