Carl and Sheila have been married for nine years. For the past five years, they have lived in the...

Question

Carl and Sheila have been married for nine years. For the past five years, they have lived in the house Sheila owns on Catalpa Ct. In August 2016, Carl purchased the house from Sheila for $325,000. Her adjusted basis for the house is $150,000. No closing costs are incurred.

Carl and Sheila continue to live in the house until March 2017 when Carl sells it for $410,000. Selling expenses are $15,000. Carl and Sheila file separate returns in 2017.

Determine if Carl is eligible for the § 121 exclusion and, if so, what is the amount of the exclusion? Also what is his recognized gain?

David · Accepted Answer

Question-1
Section 121 of Internal Revenue code provides that gain from the sale of principal residence can be excluded from the gross income subject to the following conditions:-
1. Main House: - House that is transferred is main home of the tax payer. Home address listed as postal address, listed on the driving license, home situated near to the place of work/bank.
2. Look back:- Taxpayer has not claimed any exemption on the sale of another home during the past 2 years ending on the date of transfer
3. Automatic disqualification: - House has not acquired in 1031 transfer during the past 5 years. & Tax payer is not governed by the expatriate taxation.
4. Ownership: - Tax payer has owned house at least 2 years in the past 5 years immediately before the date of sale. In case of house is transferred to the taxpayer by spouse, ownership period by the spouse can also be added to the ownership of the taxpayer. 
5. Residence: - Taxpayer has used the house as main home for a period of 2 years (need not be in a block period) in the past 5 years immediately before the date of sale. 
Carl is eligible for exclusion under 121 exclusion rules. Net Sale consideration in the hands of Carl is $395,000 ($410,000 net of selling expenses $15,000) and adjusted base for Carl is adjusted base of Sheila i.e., $150,000. Capital gain is $245,000 ($395,000 - $150,000)
Carl is eligible to exclude gain up to of $250,000, so entire gain of $245,000 is to be excluded from the gross income. Recognized gain is NIL (Graetz, 2009). 
Question-2
Following is computation Gain/ (loss) made by Blue Construction, Inc. 
	Particulars
	Amount
	Amount
	Fair Market Value of the scraper received
	
	$111,000
	Less Value of the Assets exchanged
	
	
	Cash paid
	$55,000
	
	Cost basis of the Grader exchanged 
	$61,000
	$116,000
	Loss made from the exchange
	
	$5,

Carl and Sheila have been married for nine years. For the past five years, they have lived in the house Sheila owns on Catalpa Ct. In August 2016, Carl purchased the house from Sheila for $325,000....

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