[watermelon]

Below is Becker Reg 04860.
Chris and Jennifer purchased their home in California on January 15, Year 1, for $160,000. During their ownership they made no capital improvements. On August 1, Year 4, the couple moved to Virginia from California and rented out that home. On June 30, Year 6; the couple contracted to sell the California rental home for $437,500. For the calendar Year 6, the couple will file a joint tax return. Disregarding any depreciation recapture rules, how should they treat the sale of the home for tax purposes?
a.Realized gain of $437,500; not taxable due to the home exclusion.
b.Realized and recognized gain of $277,500, taxable on Schedule D.
c.Realized and recognized gain of $277,500; taxable on Schedule E.
d.Realized gain of $277,500; not taxable due to the home exclusion.

Becker answer is D.

Based on the text book: There is a nonqualified use provision that applies if a taxpayer has non qualified use of the home on or after 2010.
so i thought since they rented their home out, not all $277,500 gain are nontaxable. I am so confused right now, anyone’s help would be much appreciated!!

[ak_cpawannabe]

Hello,
I took REG over a year ago so my knowledge faded a little bit. There was something about 2 years out 5 years ownership and use test. “You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.”

So this couple looks like owned and used the house for more than 2 years and I think that’s the reason they can exclude up to $500,000 gain if they file jointly.

[watermelon]

@Ak_cpawannabe thank you! it sounds like nonqualified provision is for those people who don't meet 2 out of 5 years rule. In this MC, since the couple met the 2 out of 5 years condition, they can exclude entire 500K from taxable income. Is my understanding right?

[ak_cpawannabe]

I think so. That’s my understanding of this rule.

Good luck on your test. REG is fun! I miss it:)

[watermelon]

Thank you!! My mind is a complete mess right now with all the details! haha

[Adam]

I think youre confused on the realized gain part correct? They sell the house..and for “book” its realized as a gain..goes on the tax return (if you recieve a 1099-S and you exclude the gain for tax purposes,,

In the real world they would have depreciation recapture and other things they would have to address upon sale of the rental.

[Author]

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