24211_ch15_final_p001-008

24211_ch15_final_p001-008 - 15 Nontaxable Exchanges...

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Nontaxable Exchanges Solutions to Problem Materials D ISCUSSION Q UESTIONS 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, and more likely, it is a nondeductible expense. (See p. 15-4.) 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. 15-4.) 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. 15-4.) 15-5 A loss on the sale of personal use property is generally not deductible. (See p. 15-4.) 15-6 a. Currently, any gain allocable to periods of nonqualified use after 2008 is not eligible for exclusion. Nonqualified use does not include that which occurred prior to 2009. In this case, nonqualified use began in 2009 so a portion of any gain will be taxable. The percentage of the gain is based on the ratio of the nonqualified use and the total time owned (including that before 2009). b. After Y uses the property as his principal residence for two years, a portion of the gain becomes excludable (nonqualified use/total time owned). A partial exclusion is available sooner if the sale is related to unanticipated circumstances. 15 15-1
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c. No, gain will be taxable to the extent of depreciation claimed after May 6, 1997. Furthermore, the prorata portion of gain allocated to the rental period (only that after 2008) before the personal use must be recognized. So moving into the residence for two years before sale will not result in the exclusion of the entire gain. (See Examples 19, 20 and 21 and pp. 15-10 to 15-13.) 15-7 August 5, 2013. Under the frequency limitation, the exclusion cannot be used for sales occurring within two years of its last use. In other words, the law allows the exclusion for one sale every two years. Since the taxpayer last used the exclusion on August 5, 2011, the two-year test will be met on August 5, 2013. (See Example 11 and p. 15-7.) 15-8
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24211_ch15_final_p001-008 - 15 Nontaxable Exchanges...

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