Question

4. Bo and Baipeng are married and buy a home in 2013. They pay $350,000 for the home. They rent it in 2013,2014, 2015 and 2016. During the 4 years they rented it, they made capital improvements of $65,000 and took depreciation deductions of $73,000. On January 1, 2017 they moved into the house and used it as their primary residence. On February 1, 2018. They moved to California, because Baipeng received a great job offer that they couldn’t turn down. They sold the home for $775,000. They bought a new home for $1 million. How much gain did they realize on the sale? How much gain did they recognize on the sale, if any? What is the character of the gain recognized, if any?

Answer 1

4. Written Down Value of the home as on January 1,2017 is $277,000 ($350,000 - $73,000)

On January 1, 2017 Bo and Baipeng moved into the home and used it as their primary residence so no depreciation is applicable on that portion of home which is use for personal residence.

On February 1, 2018 they sold the home for $775,000, however the written down value is $277,000 which is same as on January 1, 2017.

Hence Gain realized by them on sold of home is $498,000 ($775,000 - $277,000).

The Character of Gain is Long Term Capital Gain because home is held by them for more than 24 Months.