Chapter 17 Tax Consequences of Personal Activities

Sale of personal assets  General Rule—gains on sale of personal assets is taxable, while losses are not deductible  Exception—gain on sale of personal residence not taxable under following conditions:  Taxpayer and/or spouse has owned and used house as primary residence for at least 2 of past 5 years; and  Exclusion not used in prior two years;  Single taxpayers may exclude up to $250,000 gain  Married taxpayers may exclude up to $500,000 gain if both have used residence as principal residence for 2 of past 5 years and either has owned it for 2 of past 5 years

Exclusion of gain on sale of personal residence The Greiders have been married for four years. After they married, they moved into Eric Greider’s home. Eric had previously purchased the home three years before the marriage for $296,000. This year, they sold the home for $850,000. How much gain will they recognize for tax purposes?  Eric has owned the home for 7 years  Eric and Susan (his wife) have used it as their primary residence for 4 of past 5 years  Thus, exclusion is $500,000 Realized gain ($850,000 – $296,000) $554,000 Exclusion ( 500,000) Recognized (i.e., taxable) gain $ 54,000 NOTE: Taxable at capital gain rate