Troy (single) purchased a home in Hopkinton, MA, on January 1,2007, for \$300,000. He sold the home on January 1, 2016, for\$320,000. How much gain must Troy recognize on his home sale ineach of the following alternative situations? d. Troy rented thehome from January 1, 2007, through December 31, 2011. He lived inthe home as his principal residence from January 1, 2012, throughDecember 31, 2012. He rented out the home from January 1, 2013,through December 31, 2013, and lived in the home as his principalresidence from January 1, 2014, through the date of the sale.Assume accumulated depreciation on the home at the time of sale was\$0. Gain recognized? The answer is not \$28,571 The answer is not\$4,375

\$20,000

Explanation:

Time difference from the "Purchase date" to "Sale date" = 9 years (1/1/2007 to 1/1/2016)

Given that, in the 9 years, Troy rented the home for first 5 years (1/1/2007 to 1/1/2012), and lived in the home as his principal residence for next 1 year(1/1/2012 to 31/12/2012)

and again rented out the home for 1 year (1/1/2013 to 31/12/2013), and again started to lived in the home as his principal residence for next 2 years. (1/1/2014 to 1/1/2016)

i.e. when we look at the last 5 years before the sale of house, Troy has lived 3 years in the home as his principal residence.

And Troy has acquired the home for \$300,000 and not acquired by "like kind exchange" of property.

As per IRS rules, a owner must live at least 2 years in the home as his principal residence & home must not be acquired by 1031 exchange (like/kind exchange).

Here, Troy satisfies both conditions. (He has lived more than 2 years, and not acquired by like/kind exchange)

So, as per above rules, Troy's home sale is eligible for Maximum exclusion of \$250,000 gain (being Troy is Single)

Here, as per IRS rules, Gain = Amount Realized / Adjusted Basis = \$320,000 - \$300,000 = \$20,000.

But, being Troy home sale is eligible for Maximum exclusion of \$250,000, this \$20,000 gain is deducted and Net Gain = \$0.

Troy's gain on the sale of his home is \$20,000. However, he is eligible to exclude this gain from taxation because he lived in the home as his principal residence for 2 out of the 5 years leading up to the sale, as per IRS guidelines.

Explanation:

Troy's gain on his home sale depends on his usage of the property and the IRS's rules on excluding gains from the sale of a principal residence. According to these rules, a person can generally exclude the gain up to \$250,000 from the sale of a principal residence if they owned the house and lived in it as their main home for at least 2 out of the last 5 years before the sale. The years of ownership and use don't need to be consecutive.

Troy purchased the home in 2007 and sold it in 2016. He rented the home initially then lived in it as his principal residence, then rented it again, and lived in it again until the sale. Combining these periods, he lived in the house as his principal residence for only 3 years (2012, 2014, 2015). However, these years are within the 5-year window before the sale (2012-2016).

Troy's recognized gain is the selling price of the home minus the purchase price. Thus, his recognized gain is \$320,000 - \$300,000 = \$20,000. However since he lived in the residence for 2 out of the 5 years before the sale, this gain is excluded from taxation, according to IRS rules.

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