Enrolled Agent Part I: Gain on Sale of a Main Home

Jane is single and purchased a house she moved into on August 1, 2012, for $800,000. She sold the house on September 23, 2013 for $1,200,000. She did not exclude a gain from selling any other home in the past five years. How much of the gain can she exclude from the house she sold in 2013? A. $50,000 B. $250,000 C. $300,000 D. $0

A single taxpayer may exclude up to $250,000 in gain from the sale of a home if they own the home for a period of two years and use it as a main home for two of the five years prior to sale. Neither condition is met for a reduced exclusion, so no exclusion is allowed.

Kathy is an administrative assistant at a property management company in Los Angeles. She receives fringe benefits from her employer. Which of the following benefits paid by her employer is taxable for Kathy and reported on her Form W-2? A. Premiums for a life insurance policy with a $100,000 face value. B. Premiums for health insurance coverage. C. Contributions to a qualified retirement plan. D. Contributions to a Health Savings Account.

A taxpayer may exclude from income, the value of employer paid premiums for life insurance policies up to $50,000 in face value.

Alexander is single. His salary is $100,000. In 2013, he contributed $17,000, which is the 2013 deferral limit, to his employer-sponsored 401(k) plan. His employer contributed an additional $1,000. What are Alex's 2013 social security wages from this job? A. $101,000 B. $100,000 C. $84,000 D. $83,000

An employer's contributions to an employee's account in an employer-sponsored qualified retirement plan are not included in income at the time contributed. Likewise, an employee's contribution to his own account are not included in income up to the annual deferral limit. An employee's contribution is included in wages subject to social security and Medicare tax.

Jan and Peter purchased their home in 2001 for $100,000 and lived in it as their primary residence until selling the property for $300,000 in 2013. Jan is a writer and used 1/6 of the house as an office. She deducted 1/6 of all costs including depreciation since she purchased the property. The original value of the house assessed $40,000 for the land and $60,000 for the house. Jan used the straight-line method to claim $6,667 in depreciation. What is the recognized gain on the sale? A. None B. $200,000 C. $206,667 D. $6,667

Basis starts at $100,000. She claims depreciation of $6,667. This depreciation reduces basis to $93,333. She realizes a gain on the sale of $206,667 (sales price - basis). Taxpayers may be able to exclude gain from the sale of a home that they have used for business or to produce rental income if they meet the ownership and use tests. If a taxpayer is entitled to take depreciation deductions because the main home was used for business purposes or as rental property (even if they were not actually claim them), the part of the gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997 may not be excluded. Unrecaptured Section 1250 Gain is due to depreciation, which is recaptured in the year the property is disposed and taxed at a maximum rate of 25%. Her recognized gain is $6,667.

Ray sold his main home in 2013 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Which of the following statements is incorrect? A. He reports a $30,000 capital gain on Schedule D B. He writes SECTION 121 EXCLUSION and subtracts $29,500 on Schedule D C. He does not report the $29,500 portion of excluded gain on Schedule D D. He reports a $500 Unrecaptured Section 1250 gain on Schedule D

Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain of $30,000 as a long-term capital gain on Schedule D, on the line below he writes 'section 121 exclusion' and enters the exclusion amount of ($29,500) as a negative number. He reports the $500 portion of his gain as Unrecaptured Section 1250 gain on Schedule D, page 2. This question asks which statement is incorrect. Answer C states He does not report the $29,500 portion of excluded gain on Schedule D. This is an incorrect statement. If the taxpayer qualifies for any exclusion, it is shown directly below the line on which the gain is reported. The taxpayer should write the words Section 121 Exclusion and show the amount in parentheses.

Test to meet Gain on Sale of Main Home Exclusion?

1. Owned the home for at least two years; and 2. Lived in the home as main home for at least two years; and 3. Did not, in the two years before the date of the sale, exclude the gain from the sale of another home

The following fringe benefits are non-taxable except: A. Employer paid premiums on $100,000 face value life insurance policy. B. The value of accident or health plan coverage provided to you by your employer. C. Long-term care coverage contributions made by your employer to provide coverage for long-term care services. D. Contributions by your employer to your medical savings account.

A taxpayer may exclude from income, the value of employer paid premiums for life insurance policies up to $50,000 in face value.

Gain on Sale of Main Home Exclusion rules.

A taxpayer meeting both the ownership and use tests may exclude gain from the sale of a home, even if used for business or to produce rental income. If a taxpayer is entitled to depreciation deductions because he uses his main home for business or rental purposes, the part of the gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997 may not be excluded. This is true even if the taxpayer did not claim any depreciation on his prior returns

The fringe benefit that must be included in wages and reported on Form W-2 is: A. Health or accident insurance coverage provided by your employer. B. Contributions by your employer to provide long-term care services. C. Employer provided parking near the place of business valued at less than $175 per month. D. Group-term life insurance coverage in excess of $50,000.

All fringe benefits listed are non-taxable fringe benefits, with the exception of Group-term life insurance in excess of $50,000. Benefits that are less than $50,000 are not included in income.

When determining gain on the sale of a main home, a taxpayer must meet certain ownership and use tests. Which of the following is NOT a consideration? A. The taxpayer must have owned the house a minimum of two years B. The taxpayer must have occupied the home for a minimum of 24 months out of the five years ending on the date of sale C. Owner occupancy must be consecutive D. Members of the military may suspend the five year test by up to 10 years if on qualified official extended duty

All of the options included are true, except the requirement for consecutive occupancy. As long as the taxpayer (and spouse) live in the home for 24 months out of 5 years, the time there does not have to be consecutive.

In 2004, Joe and Peg refinanced the $275,000 remaining balance on loan used to build their principal residence and took cash out amounting to $50,000 to pay off their credit cards . The bank forgave the entire loan in 2013 when they became insolvent. Which statement is correct? A. The entire amount of the discharged debt is included in income for 2013. B. The entire amount is qualified principal residence indebtedness and is excluded from income. C. They may recognize the amount included in income over a 5-year period. D. Cash taken during refinancing is not qualified principal residence indebtedness.

Cash taken during refinancing is not qualified principal residence indebtedness.

Debra is single and purchased her home in Colorado Springs for $150,000 in March 2008. She lived in it as her primary residence until February 2011 when she moved to Denver. She rented her house from March 2011 until she sold it May 2013 for $240,000. While the house was rental property, Debra deducted $20,000 of depreciation. How much gain from selling the house does Debra EXCLUDE from income? A. $240,000 B. $90,000 C. $230,000 D. $110,000

Debra meets the ownership and use tests to exclude the gain. Her basis in the house is $130,000 ($150,000 purchase price - $20,000 depreciation). Her entire gain of $110,000 ($240,000 - $130,000) would be excluded from income if not for the depreciation taken when the house was rented. The $20,000 of claimed depreciation is an unrecaptured Section 1250 gain. Therefore, the amount of gain to exclude from income is $90,000.

A married couple, who are both self-employed, and work out of their home, purchased a new home in July 2011 for $420,000. In September 2011, they converted two bedrooms into office space where they meet clients in their home. In April 2013, they sold their home, on which they had taken $40,000 depreciation. Their home sold for $600,000. What amount of the gain is includable in their income on their joint return? A. $0 B. $40,000 C. $180,000 D. $220,000

During the 5-year period ending on the date of the sale, taxpayers must meet the ownership and use tests in order to claim the exclusion on the sale of a main home. Since this couple did not own or live in the home for a period of at least 2 years, they must include the entire gain in income. The gain is $220,000, which is the difference between $600,000 sales price and $380,000 adjusted basis.

Emily was single when she bought a house in September 2003 for $200,000. She lived in it as her primary residence until she sold it in June 2013 for $500,000. She realized a gain of $300,000 on the sale. Later in 2013, she married Bob and moved into his house. Can Bob and Emily exclude Emily's entire gain from their income? A. Yes, because they are married. B. Yes, because Emily satisfied all the requirements before she married Bob. C. No, because Bob does not meet the ownership and use tests. D. No, because Bob already owns a house.

Emily met the ownership test and use test but Bob did not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. The $500,000 maximum exclusion for certain joint returns does not apply because Bob does not meet the use test.

Rev. William Wilson is a full-time minister. The church allows him to use a parsonage that has an annual fair rental value of $24,000. The church pays him an annual salary of $67,000, of which $7,500 is designated for utility costs. His actual utility costs during the year were $7,000. What is his income for income tax purposes? A. $59,500. B. $60,000. C. $67,000. D. $91,000.

For income tax purposes, Rev. Wilson excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 for utility costs). The portion of salary not designated for utility costs is $59,500. Out of the $7,500 for utility costs, he only spends $7,000, and must include the $500 difference in income. For income tax purposes, he reports $60,000 ($59,500 salary plus $500 of unused utility allowance). His income for SE tax purposes is $91,000 ($67,000 + $24,000 fair rental value of the parsonage.)

When Amelia bought her first home in 2008, she paid $100,000 plus $1,000 closing costs. In 2009, she adds a deck that cost $5,000. She continues to use the home as her primary residence until July of 2013. At that time, a real estate dealer accepted her house as a trade-in and allows her $125,000 toward a new house priced at $200,000. How should Amelia report this transaction on her 2013 return? A. $19,000 long-term capital gain B. No reporting because the trade is not a sale C. $0 taxable gain and reduce her basis in her new house by $19,000 D. No reporting required

Her adjusted basis was $106,000, and her old home sold for $125,000, resulting in a gain of $19,000. The IRS did not provide enough information to determine if she meets the use test; however, as a first home that is primary residence that is a reasonable assumption. Provided that is the case, she qualifies to exclude the entire amount of the gain and therefore does not need to report this transaction at all.

George bought his first home in 2009 for a price of $200,000 plus $10,000 of closing costs. In 2010, he adds a room over the garage for a cost of $15,000. He lives in the house until 2013, before trading the house to a real estate investor. George also pays $75,000 in that transaction, acquiring the new house for $400,000. How should George report this transaction on his 2013 tax return? A. $75,000 long-term capital gain B. $100,000 long-term capital gain C. $0 taxable gain and reduces his basis in the new house by $75,000 D. No reporting required

His adjusted basis in his old home is $225,000. The transaction does not qualify as a nontaxable exchange under Sec. 1031. It is treated as a separate sale and purchase. The value received for the house is $325,000, and $75,000 is cash, totaling $400,000 for the new house. He must allocate $325,000 of the purchase price to the sale of his prior home. This produces a gain of $100,000. Assuming that George lived in the house as his primary residence during his ownership, he qualifies to exclude the entire amount of gain and therefore does not need to report this transaction at all.

In December 2013, Bubba Corporation provided a free turkey or ham to every employee who asked for one. Do the employees who received a turkey or ham have any tax consequence? A. No, because these are holiday gifts of nominal value. B. No, because these gifts are part of a qualified plan. C. Yes, the fair market value of the turkey or ham is added to the W-2 wages of each recipient. D. Yes, recipients have to report the fair market value of the turkey or ham as other income on their tax returns.

If an employer provides his employees with a turkey, ham, or other item of nominal value at Christmas or other holidays, the employee should not include the value of the gift in his income.

In 2009, Lew bought property that consisted of a house, a stable, and 35 acres. He used the house and 7 acres as his main home and used the stable and 28 acres in his business for the next 4 years. He sold the entire property in 2013 at a $10,000 gain. Which of the following statements is incorrect? A. Lew met the ownership and use tests for the house but did not meet the use test for the stable. B. Lew must report the entire gain on his return, but he can claim a section 121 exclusion on Schedule D for his main home. C. Lew reports the gain on the business part of his property on Form 4797. D. He can exclude the gain on the part of the property that was his main home.

Lew met the ownership and use tests for the house but did not meet the use test for the stable. Since the business part was separate from his home, Lew must allocate the basis of the property and the amount realized between the part of the property he used for his home and the part he used for his business. Lew reports the gain on the business part of his property on Form 4797. He can exclude the gain on the part of the property that was his main home. He does not report the gain from the part used as his home because he can exclude all of it.

Ben Green received three employee achievement awards during the year: a non-qualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. How much of the awards he received must he include in his income? A. None, because he received qualified plan awards. B. None, because the rewards were all tangible personal property and not cash or cash equivalents. C. $250. D. $150.

If the requirements for qualified plan awards were otherwise satisfied, each award by itself would be excluded from income. But, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 - $1,600) in his income. If an employee receives tangible personal property, other than cash, a gift certificate, or an equivalent item, as an award for length of service or safety achievement, she generally can exclude its value from her income. But the excludable amount is limited to the employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards the employee receives during the year. If during the year an employee receives awards not made under a qualified plan and also receives awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. The $400 and $1,600 limits cannot be added together to exclude more than $1,600 for the cost of awards to any one employee during the year. The employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.

What happens with the depreciation already taken from a Main home after it is sold?

If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. MUST REDUCE BASIS BY DEPRECIATION AMOUNT.

What can be considered a main home.

In addition to a house, a main home may also be a condominium, cooperative apartment, houseboat, or mobile home.

How is a depreciation claim on main home reported after the sale of the home?

Recognize depreciation as gain as unrecaptured section 1250 gain. Must report the exclusion and the taxable gain on Schedule D (Form 1040).

Anne, who is single, owned and used her house as her main home from January 2007 until January 2012. She then moved away and rented her home from February 2012 until she sold it in August 2013. Her home sold for $240,000, and she had $12,000 of selling expenses. Over the years she claimed $20,000 of depreciation. Using a zero basis, compute the amount that is excludable from income. A. $208,000 B. $220,000 C. $228,000 D. $240,000

Sale price $240,000 less costs $12,000 leaves net gain $228,000. Ann meets the exclusion tests and could normally exclude up to $250,000. However, she may not exclude the gain related to previously claimed depreciation. She can only exclude $208,000 and must report the other $20,000 as unrecaptured Section 1250 gain.

Karen, who is single, paid $150,000 for her residence in January 2009 and lived in it until January 2012. She then moved away and rented her home from February 2012 until she sold it August of 2013 for $240,000. While it was rental property, she deducted $20,000 of depreciation. What amount of gain on the sale of her residence is excludable from income? A. $250,000 B. $90,000 C. $110,000 D. $240,000

Sales price of $240,000 less adjusted basis of $130,000 leaves net gain $110,000. This would be fully excluded if it were not for the claimed depreciation. Report the $20,000 of claimed depreciation as an unrecaptured Section 1250 gain. Therefore, the correct amount to exclude is $90,000. IMPORTANT: The law recently changed. Generally, the gain from the sale or exchange of a main home will not qualify for the exclusion to the extent that gains are allocable to periods of nonqualified use. Nonqualified use is any period after 12/31/08, during which the taxpayer does not use the property as a main home. A period of nonqualified use does not include any portion of the 5-year period ending on the date of the sale or exchange that is after the last date taxpayer (or spouse) uses the property as a main home.

Todd and Patti purchased their Phoenix home in 2001 for $250,000 and incurred settlement costs of $10,000. They lived in the house as their primary residence until selling it in 2013 for $1,000,000. They paid a commission of $60,000 to a real estate broker for selling the property. Over the years, they added improvements to the home that cost $100,000. Todd and Patti are married and file a joint tax return. What is their taxable gain from selling the home in 2013? A. $750,000 B. $740,000 C. $80,000 D. $580,000

The couple meets the tests (owned over 2 years and lived in at least 24 of prior 60 months) to exclude up to $500,000 of gain. Their basis is $420,000 ($250,000 + $10,000 + $60,000 + $100,000). Subtracting this basis from the sale price of $1,000,000 results in a $580,000 gain. Deducting the exclusion leaves a taxable gain of $80,000.

Paula normally rides the subway to her job on Wall Street from her apartment on the upper east side. Her boss frequently asks her to work late. In order for Paula to not take a late night subway ride after working late, her boss takes money from the company's petty cash drawer to pay for Paula's cab fare home. During 2013, the total amount removed from petty cash for Paula's cab fares was $1,500. Does Paula have to report the cab fare money as income? A. Yes, because Paula was given cash. B. Yes, because the taxi fare is a benefit of her employment. C. No, because the taxi fare is provided for the employer's benefit. D. No, because the total taxi fare money is less than $1,600.

The taxi fare is a de minimis benefit of her employment and is provided primarily for the employer's benefit. If an employer provides an employee with a product or service having a cost that's too small for reasonable accounting, the value is not included in the employee's income. Generally, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included as income.

Dennis and Martha sell their lake house (which they have owned for 10 years and spend each summer in) for $250,000. Their original cost was $175,000 and they had improvements of $25,000. They have never used the house as a business or rental property. They agreed to take $50,000 down and finance the balance. Monthly payments are to begin next year. How much capital gain must they report in the year of sale? A. $10,000 B. $50,000 C. $15,000 D. $ -0-

They have a gain of $50,000 (sold for $250,000 - $200,000 adjusted basis). They cannot exclude the gain (Item D) because they do not meet the use test (it is not their main home). Under the installment method, Gross Profit Percentage is 20% ($50,000 divided by $250,000). This is the percentage of each payment to include in income. Since they only received $50,000 in the current year, $10,000 is taxable.

If I go in vacation for a few months, can I still claim the Gain on Sale of Main Home Exclusion?

Yes. Vacations are short temporary absences and are counted as periods of use in determining whether the taxpayer used the home for the required two year period.

If part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, do you need to allocate gain on the sale of the property between the business and used as home parts?

You DO NOT need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation.