Question

Alisha, who is single, owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. She purchased the home at the beginning of year 1 for $400,000. Since she purchased the home and moved into it she has been able to deduct $10,000 of depreciation expenses to offset her consulting income. At the end of year 3, Alisha sold the home for $500,000. What is the amount of taxes Alisha will be required to pay on the gain from the sale of the home? Alisha’s ordinary marginal tax rate is 32 percent. (Ignore the net investment income tax.)

Answer 1

Amount realized		500000
Beginning basis	400000
Less: depreciation	(10000)
Adjusted basis		390000
Gain realized		110000
Gain eligible for exclusion (gain realized minus depreciation expense		100000
Less: exclusion amount (lesser of gaineligible for exclusion or $250,000)		100000
Total gain recognized(Gain realized minus exclusion)		10000

Gain on the sale of the home is attributed to depreciation and therefore is not eligible to be excluded under the home sale exclusion provisions. This gain is considered to be as unrecaptured §1250 gain and maximum applicable rate is 25%

Taxes = 10000*25% = $2500

Taxes to be paid on the gain on sale of the home

$2500