CPA Regulation (REG) : Sale of Principal Residence

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Sale Of Principal Residence

Under a divorce settlement, Joan transferred her 50% ownership of their personal residence to Jim. The joint basis of the residence was $200,000. At the time of the transfer, the property’s fair market value was $300,000. What was Joan’s recognized gain and Jim’s basis for the residence?

Possible Answers:

Recognized Gain: $0

Basis: $200,000

Recognized Gain: $50,000

Basis: $300,000

Recognized Gain: $0

Basis: $300,000

Recognized Gain: $50,000 

Basis: $250,000

Correct answer:

Recognized Gain: $0

Basis: $200,000

Explanation:

In this instance, there is no gain recognized because no consideration changed hands. Additionally, since Jim was an original owner of the home, upon the settlement Joan’s 50% share transfers to him, but the basis does not change. 

Example Question #2 : Sale Of Principal Residence

Decker, a 62-year-old single individual, sold his principal residence for the net amount of $500,000 after all selling expenses. Decker bought the house 15 years ago and occupied it until it was sold. On the date of sale, the house had a cost basis of $200,000. Within six months, Decker purchased a new house for $600,000. What amount of gain should Decker recognize from the sale of the residence?

Possible Answers:

$175,000

$50,000

$300,000

$0

Correct answer:

$50,000

Explanation:

For individuals, the maximum exclusion of gain for individuals on the sale of their home is $250,000; the amount goes up to $500,000 for married couples who file jointly. Since Decker, a single taxpayer, sold the house at a gain of $300,000 ($500,000 less the original cost of $200,000), he may take the $250,000 exclusion and the remainder, $50,000, is a taxable gain. The cost of the new house does not affect the amount of exclusion or recognized gain.

Example Question #1 : Individual Tax Issues

In December, Year 11, Douglas, a single taxpayer, purchased a new residence for $200,000. Douglas lived in the residence continuously from Year 11 until selling the residence in July, Year 18, for $455,000. What amount of gain is recognized from the sale of the residence on Douglas’ Year 18 tax return?

Possible Answers:

$0

$255,000

$455,000

$5,000

Correct answer:

$5,000

Explanation:

For individuals, the maximum exclusion of gain for individuals on the sale of their home is $250,000; the amount goes up to $500,000 for married couples who file jointly. Since Douglas, a single taxpayer, sold the house at a gain of $255,000 ($455,000 less the original cost of $200,000), he may take the $250,000 exclusion and the remainder, $5,000, is a taxable gain. 

Example Question #4 : Sale Of Principal Residence

A owns a second residence that is used for both personal and rental purposes. During the current year, A used the second residence for 50 days and rented the residence for 200 days.  Which of the following is correct?

Possible Answers:

All mortgage interest and taxes on the property will be deducted to determine the property’s net income or loss

Utilities and maintenance on the property must be divided between personal and rental use

A rental loss may be deducted if rental based expenses exceed rental income

Depreciation may not be deducted on the property under any circumstances

Correct answer:

Utilities and maintenance on the property must be divided between personal and rental use

Explanation:

As the second property was personally used for more than 14 days, any net loss from the rental of the property will be disallowed

Example Question #5 : Sale Of Principal Residence

Andrew and Brittany are married. They have resided full time in their principal residence for the last 20 years. They have decided to sell their home. Once the transaction was finalized, they were presented with the final amounts. Sale price = $750,000 Cost basis = $100,000. How much of a gain must the two recognize from the sale on their joint tax return?

Possible Answers:

$150,000

$650,000

$300,000

$400,000

Correct answer:

$650,000

Explanation:

Each spouse would be able to claim their $250,000 deduction against the gain of sale of a principal residence. Together, this deduction would total $500,000. $750,000-$100,000-$500,000=$150,000

Example Question #6 : Sale Of Principal Residence

For a move of principal residence within the United States due to a change in job, which expenses can be deducted as moving expenses?

Possible Answers:

Moving costs

Fuel costs

None

Temporary living costs

Correct answer:

None

Explanation:

Only moving expenses for military orders are deductible now under current tax legislation.

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