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Mr. and Mrs. Smith sold their principal residence for $750,000. They had lived in their home...

Mr. and Mrs. Smith sold their principal residence for $750,000. They had lived in their home for 20 years, and it had an adjusted basis of $210,000. The Smiths have decided not to purchase a new home and will instead rent a condominium on the beach. What amount of gain must they recognize on this transaction.

A. $0

B. $40,000

C. $540,000

D. $750,000

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Answer #1

For Mr & Mrs. Smith,

Amount of Gains on Sale of Primary Residence

Sale Revenue. = $750,000

- Adjusted Basis. = $210,000

Gross Gains. = $540,000

- Exclusions due to Section 121 = $500,000

Net Gains. = $40,000

Section 121 Excludes $500,000 for a married couple of Gains on the sale of Real Property if the owner owned and used it as Primary Residence for two of the five years before date of Sale. Since, in the question all above conditions are satisfied, $500,000 income has been excludes from the Gains.

Ans : Net Gains from sale of Primary Residence is $40,000

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