Question

Wesley is single and purchases a principal residence on April 1, 2017 for $125,000. Wesley also pays $100,000 to make significant improvements to the residence. Wesley owns and occupies this residence until March 31, 2018, at which time he sells his principal residence to move across country for a new job. Wesley sells the residence for $380,000 and pays $20,000 in commissions and legal fees in connection with the sale. Calculate Wesley's realized gain and recognized gain on the sale of his principal residence.

**Please use 2018 US Tax Laws**

Answer 1

Calculation of Recognized gain:

Recognized gain can be determined by simply deducting the amount invested from the sale price.

In this Problem,

Recognized gain = Sale consideration - Purchase price

= $ 380,000 - $ 125,000

  = $ 255,000.

While computing the recognized gain, the cost of improvement and selling expenses should be ignored.

Though Wesley is single and selling his principal residence, he does not qualifies for Tax break of $ 250,000 ($500,000 in the case of married) Because Wesley does not satisfy the conditions for Tax break i.e., he must stay in the primary residence for at least 2 years out of 5 Years. He stays in his residence for only one year i.e., (From April 1,2017 to March 31,2018)

Taxable portion in the recognized gain is the realized gain. Realized gain is equal to recognized gain since there is no exemption as per 2018 US Tax laws. i.e., Realized gain = $ 255,000