Chapter 12 Answer Learning Objective 1 Sale of a principal residence 1 Individuals who sell or exchange their personal residence, may exclude part or all of the gain if the house was owned and occupied as a principal residence for A) at least five years immediately before the sale date. B) at least one year of the three-year period before the sale date. C) at least two years of the five-year period before the sale date. D) at least five years of the ten-year period before the sale date. Answer: C Explanation: C) The residence had to be owned and occupied as a principal residence for at least two years in a five year period before the sale or exchange. 2 Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie in the current year. Sophie pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and $1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $125,000. What is the amount of gain recognized on the sale? A) $-0- B) $100,000 C) $165,000 D) $170,000 Answer: A Explanation: A) Their realized gain of $165,000 is not recognized because they meet the requirements of the exclusion for sale of personal residence. Amount realized ($225,000 + $70,000 - $4,000 - $1,000) $290,000 Adjusted basis 125,000 Gain realized $165,000 3 Gary and Gerdy Gray purchased a home for $125,000 on September 15, Year 1. On October 7, Year 2, they were divorced, and as part of the divorce agreement, the home was transferred to Gerda who sold the home on October 18, Year 3 for $350,000. Assume Gerda use the home as primary residence from September 15, Year 1 to October 18, Year 3. How much can Gerda exclude? a. $350,000 b. $250,000 *c. $225,000 d. $-0- General Feedback: Gerda excludes the $225,000 gain since she can count the time that Gary owned the residence which makes the ownership and use more than two years.
4 Bernadette sold her home. She received cash of $40,000, the buyer assumed her mortgage of $180,000, and she paid closing costs of $2,300 and a broker’s commission of $7,000. she owned and used the house as her principal residence for two of the previous five years. Her filing status is single. If she has a basis in the home of $138,000, what is her taxable gain on the sale? A) $ 210,700. B72,700. C) $ 5,000. D) $ 0. Answer: D Amount Realized: 40,000+180,000-2300-7000=210,700 Realized gain=210,700-138,000=72,700<250,000 excludable gain. Learning Objective 2 Like-kind Exchange 5 A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $12,000 in depreciation. The old automobile is currently worth $20,000, and the new automobile Taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss recognized by the taxpayer on this transaction?
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- Fall '12
- Financial Accounting, Automobile