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taxation chapter14 - Chapter 14 Tax Consequences of Home...

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Chapter 14 Tax Consequences of Home Ownership SOLUTIONS MANUAL Discussion Questions 1. [LO 1] A taxpayer owns a home in Salt Lake City, Utah and a second home in St. George, Utah. The taxpayer sells the home in St. George at a gain. How does the taxpayer determine which home her principal residence is for purposes of qualifying for the exclusion of gain on the sale of a personal residence? When a taxpayer lives in more than one residence during the year, the determination of which residence is the principal residence depends on the facts and circumstances. Factors to consider in making this determination include the amount of time the taxpayer spends at each residence during the year, the proximity of each residence to the taxpayer’s employment, the principal place of abode of the taxpayer’s family, and the taxpayer’s mailing address for bills and correspondence among other things. 2. [LO 1] What are the ownership and use requirements a taxpayer must meet to qualify for the exclusion of the gain on the sale of a residence? Ownership test: The taxpayer must have owned the property for a total of two or more years during the five-year period ending on the date of the sale. Use test: The taxpayer must have used the property as the taxpayer’s principal residence for a total of two or more years during the five-year period ending on the date of the sale. Married couples are eligible for the married filing jointly exclusion amount if either spouse meets the ownership test and both spouses meet the principal use test. 3. [LO 1] Under what circumstances, if any, can a taxpayer fail to meet the ownership and use requirements but still be able to exclude all of the gain on the sale of a principal residence? The taxpayer may be able to exclude the gain on the sale of a principal residence when she sells the home due to unusual circumstances such as a change in employment, significant health issues, or other unforeseen financial difficulties. To qualify for the exclusion due to a change in employment, the taxpayer’s new place of employment must be at least 50 miles farther from the residence that is sold than was the previous place of employment. That is, the taxpayer will not qualify unless the taxpayer’s commute from the old home to the new job is at least 50 miles longer than the taxpayer’s commute from the old home to the old job. The maximum exclusion available to a taxpayer selling under these circumstances is the product of (1) the maximum exclusion had the taxpayer fully qualified for the exclusion (i.e., $250,000 for a single taxpayer or $500,000 for a taxpayer filing a joint return) and (2) the ratio of (a) the number of days or number of months the taxpayer met the ownership and use requirements to (b) 730 days or 24 months, respectively. The taxpayer may use either days or months in the computation. Note that under this “hardship” provision, the maximum limitation is reduced, not necessarily the excludable gain. Consequently, if the taxpayer has
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