Question

Sarah (single) purchased a home on January 1, 2008, for $600,000. She eventually sold the home for $800,000. What amount of the $200,000 gain on the sale does Sarah recognize in each of the following alternative situations? (Assume accumulated depreciation on the home is $0.)

a) Sarah used the home as her principal residence through December 31, 2015. She used the home as a vacation home from January 1, 2016, until she sold it on  January 1, 2018.

b) Sarah used the property as a vacation home through December 31, 2015. She then used the home as her principal residence from January 1, 2016, until she sold it on January 1, 2018.

c) Sarah used the home as a vacation home from January 1, 2008, until January 1, 2017. She used the home as her principal residence from January 1, 2017, until she sold it on January 1, 2018.

d) Sarah used the home as a vacation home from January 1, 2008, through December 31, 2011. She used the home as her principal residence from January 1, 2012, until she sold it on January 1, 2017

Answer 1

a .$200,000 of gain is excluded and $0 gain is recognized. Sarah meets the ownership and use tests because she has owned the property for two or more years and used it as her principal residence for at least two out of the last five years, so she can exclude her gain up to $250,000. She does not have any nonqualified use because the nonqualified use period does not include the five tax years immediately after she stopped using the home as a principal residence.

b .$60000 of gain is excluded and $140000 of gain recognized. If not for the limitation for nonqualified use after December 31, 2008, Sarah could have excluded the entire $200,000 gain. However, because Sarah sold the home after December 31, 2008 and she had nonqualified use after December 31, 2008, she is not allowed to exclude a percentage of the gain that would otherwise be excluded. The percentage of the gain that is not excluded is a fraction, the numerator of which is the nonqualified use after December 31, 2008, and the denominator is the amount of time she owned the property. In this case, $140000 of the $200,000 gain (70%) is not excludable. The numerator of the disallowance fraction is 7 years of post 2008 nonqualified use (January 1, 2009 through January 1, 2016) and the denominator is 10 years of ownership (January 1, 2008 through January 1, 2018) (7/10) = 70%

c.)200,000 gain recognized. While Sarah meets the ownership test, she does not meet the use test because she used the property as her principal residence for less than two of the last five years.

d)$133333 of gain is excluded and $66667 of gain recognized. If not for the limitation for nonqualified use after December 31, 2008, Sarah could have excluded the entire $200,000 gain. However, because Sarah sold the home after December 31, 2008 and she had nonqualified use after December 31, 2008, she is not allowed to exclude a percentage of the gain that would otherwise be excluded. The percentage of the gain that is not excluded is a fraction, the numerator of which is the nonqualified use after December 31, 2008, and the denominator is the amount of time she owned the property. In this case, $ of the $200,000 gain (33.33%) is not excludable. The numerator of the disallowance fraction is 3 years of post 2008 nonqualified use (January 1, 2009 through January 1, 2012) and the denominator is 9 years of ownership (January 1, 2008 through January 1, 2017) (3/9) = 33.33%