Chapter 12 Fall 2011 - ACCT 403 CHAPTER 12 FALL 2011...

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ACCT 403 CHAPTER 12 – FALL 2011 NONTAXABLE TRANSACTIONS I. Sale of Personal Residence. A. Taxpayers may exclude up to $250,000 of gain, [$500,000 for taxpayers filing a joint return] on the sale of their principal residence. 1. If a single taxpayer who otherwise is eligible for an exclusion marries someone who used the exclusion within two years, the maximum exclusion is $250,000. 2. To be eligible for the exclusion, a taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange. a. Example 41, page 21. 3. For property settlements pursuant to a divorce proceeding, or death of a spouse, the period the taxpayer owns the property and uses it as a principal residence includes the time the transferor owned and used the property. 4. For taxpayers who own a residence before marriage and sells it after marriage, the spouse must live there 2 years to receive the $500,000 exclusion. a. Example 44, page 22. 5. If a taxpayer marries and his or her spouse sold a home withing two years, only $250,000 of the exclusion is available. a. Examples 45-46, page 22. B. Determination of Gain Realized. 1. Amount Realized less Basis. 2. Amount Realized equals the contract price less selling expenses (commissions, legal expenses, termite inspection fee, etc.). 3. Basis equals cost plus improvements less gain deferred under the former rollover provisions (from sales prior to May 7, 1997). a. Examples 38-39, page 20. 4. The gain exclusion does not apply to the portion of the gain attributable to depreciation allowable with respect to the rental or business use of the principal residence after May 6, 1997. a. For taxpayers who claim a home office deduction (which includes allowable depreciation), they must weigh the benefits of claiming a current depreciation deduction and the cost of reporting future gain (to the extent of depreciation) in the year the residence is sold. C. Failure to meet two-year rule requirements. 1. A taxpayer who fails to meet ownership and use requirements by reason of a change of employment, health, or unforeseen circumstances, is able to exclude a portion of the gain.
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2 a. The excluded portion equals the product of the exclusion amount [$250,000 or $500,000] and a fraction. The fraction is determined by dividing by 730 days the shorter of (1) the number of days the residence is owned and occupied as a principal residence, or (2) the number of days after the most recent sale. b. Treasury Regulations include the following events as unforeseen circumstances. 1. Involuntary conversion of the residence. 2. A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence. 3. Death of taxpayer. 4. Cessation of employment as a result of which the individual is eligible for unemployment compensation, 5. A change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household.
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