Question

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Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $700,000. (Leave no answer blank. Enter zero if applicable.)

d. Assume the original facts, except that Stephanie moves in with Steve on March 1 of year 3 and the couple is married on March 1 of year 4. Under state law, the couple jointly owns Steve’s home beginning on the date they are married. On December 1 of year 3, Stephanie sells her home that she lived in before she moved in with Steve. She excludes the entire $50,000 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?

Recognized gain what?

Answer 1

As per U.S. Internal Revenue Service, If a taxpayer meets the following tests, they can exclude up to $500,000 (if married and file a joint return) of the gain from the sale of a main home:

• The Ownership test - The taxpayer must have owned the home for at least 2 out of the last 5 years leading up to the sale of the home.
• The Residence test - The taxpayer must have lived in the home as their main home for at least 2 of the past 5 years.

Stephenie lived in her house for 2 years before her marriage and it was her primary home, hence the couple qualifies for the married filing joint exclusion . Thus, they can exclude the entire gain, i.e $ 50,000

Recognized gain = $ 50,000