Question

John and Mary are married and file a joint return. During the year they decided to sell their residence, which had a $200,000 adjusted basis. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they paid $5,000 in April to have the inside of the house cleaned and painted. They sold the house in May for $800,000. Broker’s commissions and other selling expenses totaled $50,000. Calculate John and Mary’s recognized gain on the sale of their home.

A. $45,000 B. $100,000 C. $550,000 D. $50,000

Answer 1

Answer: Option D is correct ; $50,000

Explanation:

Computation of recognized gain on the sale of residence:

Sale Value of house	$800,000
Less: Broker's commissions and other selling expenses	($50,000)
Net realized value	$750,000
Less: Adjusted basis	($200,000)
Realized gain	$550,000
Exclusion under section 121 (Note 1)	$500,000
Recognized gain	$50,000

Notes:

1.  John are Mary are married couple and lived in the residence for 20 years. IRS allows you to treat the residence as a personal and excludes a portion of the gain from tax amounting to $500,000 if married or $250,000 if you are single.

2. Expense amounting to $5,000 for making the residence attractive is not capitalised, therefore it is not deductible from sale value.

Hope the above clarifies.