Question

Virginla Is an accountant for a global CPA firm. She Is belng temporarily transferred from the Ralelgh, North Carolina, office to Tokyo. She will leave Raleigh on October 7, 2018, and wiIll be out of the country for four years. She sells her personal residence on September 30, 2018, for $228,750 (her adjusted basls Is $195,000). Upon her return to the United States In 2022, she purchases a new residence in Los Angeles for $213,500, where she will continue workling for the same firm a. What are Virginla's realized and recognized galn or loss? (If there is no galn or loss is recognized, select "No galn/loss") b. What Is Virginia's basls In the new residence? a. b. Basis of new residence

Answer 1

The amount realized is used to calculate realized gains and losses. To calculate a realized gain or loss, take the difference of the total consideration given and subtract the cost basis. If the difference is positive, it is a realized gain. If the difference is negative, it is a realized loss.

Recognized gain is the taxable portion of your realized gain. When you're selling a piece of property in a traditional sale, your recognized gain and realized gain are often the same.

a. Virginia’s realised and recognised gain = Selling Price - Adjusted Basis = $228,750-$195,000 = $33,750.

Sec. 1034 is a non-recognition provision which involves the replacement of a principal residence ("old residence") with another principal residence ("new residence"). If Sec. 1034 applies, the taxpayer rolls over the gain from the sale of the old residence into a new residence, and this process will continue through successive sales until a sale occurs in which Sec. 1034 does not apply.

Under Sec. 1034, if the taxpayer: (1) sells the old residence and acquires a new residence; and (2) the acquisition of the new residence occurs within 2 years of the sale of the old residence (NOTE: the new residence can be acquired up to 2 years prior to the sale of the old residence); then (3) Sec. 1034 will apply to the extent the cost of the new residence exceeds the adjusted sales price (discussed below) of the old residence. NOTE: The comparison is between the adjusted sales price of the old residence and the cost of the new residence.

NOTE: There is no tracing of proceeds from the sale of the old residence to the acquisition of the new residence. The old residence could be sold on an installment basis and the new residence could be purchased for cash from savings or from borrowed funds.

Sec. 1034 contains a limitation to prevent the rapid purchase and sales of residences under the provision: There must be at least 2 years between each sale of a residence.

Since, the new residence us purchased 4 years after the sale of old residence, hence Section 1034 cannot be applied over here.

b. Basis of new residence = Purchase Cost = $ 213,500