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H Chapter Fifteen H NONTAXABLE EXCHANGES SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 15-1 This question is relevant because an improvement increases a property’s basis, while a repair is an expense. An expense related to a personal residence is a disallowed personal expense. In the case of a roof, it should be capitalized if it substantially increases the value of the property or substantially extends its life. Otherwise, it is a nondeductible expense. (See p. 15-3.) 15-2 The question as to where one’s principal residence is is a question of facts and circumstances. The principal residence would be the one that truly more represents the center of the taxpayer’s activities. In the case presented, the facts seem to indicate that the Milwaukee residence is V’s principal place of residence, even though she may have spent more nights in Chicago. Additional factors to be considered would be the residence of immediate family members, if any, voter registration, driver and vehicle registrations, etc. (See p. 15-3.) 15-3 The taxpayer must have (1) owned the residence and (2) occupied it as his or her principal residence for two of the five years immediately preceding the date of sale. (See p. 15-5.) 15-4 The maximum amount of gain that can be excluded under § 121 is generally $250,000. This amount is increased to $500,000 for a married couple filing jointly if both spouses meet the occupancy test and either spouse meets the ownership test. A reduced maximum applies for taxpayers who fail to meet the two-year tests due to unanticipated events. (See p. 15-5.) 15-5 A loss on the sale of personal use property is generally not deductible. (See p. 15-4.) 15-6 a. Yes. b. After Y uses the property as his principal residence for two years. A partial exclusion is available sooner if the sale is related to unanticipated circumstances. c. No, gain will be taxable to the extent of depreciation claimed after May 6, 1997. (See p. 15-5.) 15-7 August 5, 2009. On that date, the two-year test will be met. (See p. 15-5.) 15-8 Although G would meet the two of five year requirement on December 7, 2008, he will first be eligible for the § 121 exclusion on June 2, 2009 under the one sale every two years rule. (See p. 15-7.) 15-9 a. Yes because the sale is due to unanticipated events. But the maximum exclusion is reduced since she does not meet the two year requirement. b. Assuming S is single, she may exclude $88,542 [$250,000 ± 8.5/24]. c. Other unanticipated events. No specific examples are provided in the statute, but job termination, serious illness, death of a member of household, divorce or separation, qualifying for unemployment, and loss of income are some that have been identified in regulations. (See p. 15-7.) 15-1
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15-10 Under prior law, gain could be excluded with the exception of any depreciation allowed after May 6, 1997. Any gain allocable to a rental period or other unqualified use after 2008 must be recognized. First, recapture is required. Then any remaining gain is recognized in an amount equal to: the remaining gain x period of nonqualified use after 2008 / total period of use. So R should consider limiting the rental period after 2008. (See pp. 15-11 to 15-13.) 15-11 $250,000. D and E do not qualify for the $500,000 exclusion because E did not use the home as her
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