CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsMedium
A client, Ms. Kim, sells her primary residence for $750,000 on June 1, 2023. She purchased it on July 1, 2020, for $400,000 and lived in it as her primary residence until the sale. She is single. What is her recognized gain on the sale?
- A$100,000
- B$0
- C$350,000
- D$250,000
Show answer & explanationAnswer & explanation
Correct answer: A. $100,000
Ms. Kim is single and meets the ownership and use tests (lived in the home for at least 2 out of the last 5 years). She can exclude up to $250,000 of gain. Realized Gain = $750,000 (selling price) - $400,000 (basis) = $350,000. Excludable Gain = $250,000. Recognized Gain = Realized Gain - Excludable Gain = $350,000 - $250,000 = $100,000.
Why the other options are wrong
- B. This would be true if her realized gain was $250,000 or less.
- C. This is the total realized gain, without applying the Section 121 exclusion.
- D. This is the maximum exclusion amount, not the recognized gain.
Section 121 Exclusion (Single)
A single taxpayer can exclude up to $250,000 of gain from the sale of a primary residence if they owned and used the home as their main home for at least two out of the five years preceding the sale.
- Maximum exclusion: $250,000 for single, $500,000 for married filing jointly.
- Must meet ownership and use tests (2 out of 5 years).
- Can only be used once every two years.
Memory trick: Two-five rule, then exclude your cool. Single gets $250k, married gets more play.