UNIVERSITY OF WASHINGTON
Accounting 530
Issues of Property Ownership
PROBLEM #9 - SALE OF RESIDENCE
READING ASSIGNMENTS:
Code:
§§ 121
Regulations: Proposed Regulations §§1.121-1 through §§1.121-5. Original regulations to extent still relevant and not changed by proposed regulations.
Cases:
Administrative: Rev. Rul. 82-1 , 1982-1 CB 26,
Letter Ruling 199912026, (Dec. 23, 1998).
PROBLEM ASSIGNMENTS:
1. Rezy Dense bought her home many years ago for $40,000. The first mortgage balance is $22,000. She has refinanced the home and the second mortgage balance is $264,000. By Dahome will pay Rezy $80,000 down and borrow $270,000 to pay off the balance of what is owing by him. All of the underlying loans will be extinguished through closing so that Rezy will receive cash of $64,000. Rezy will purchase another home by paying $30,000 down and signing a note and mortgage in the amount of $110,000. Calculate the realized gain, recognized gain and basis of the new home in the alternative questions given below.
a. Suppose that Rezy spent $1,100 0n painting for her old home and $900 on painting for her new home.
b. Suppose Rezy bought the new home on February 15 of last year and sold the old home on August 24 this year. The $1,100 was incurred on August 3 this year and she paid the $1,100 on November 24 this year after squabbling over the quality of the work.
c. Suppose in a., that Rezy paid $1,400 (2 points) to the bank to "buy down" the interest rate for By.
d. Suppose, in a. that Rezy also borrowed $5,000 to fix the deck on the new home.
2. Jerry Ahtrix, age 81, bought his Seattle home in the 1970's for $150,000. His wife died in 1983 when the home was worth $340,000. Today, his home is worth $700,000. He has had an office in his home for his proprietorship for about fifteen years. He has taken depreciation deductions of $15,000 which relates to 20% of the home (where the office was). Jerry has met Lou Kenfurbux, age 26, and they have decided to marry. Lou needs to live in Bellevue. Jerry is willing to sell his house and buy another one, but he would like to scale back a little. Lou is impatient and they will probably buy a new home before the old home sells. When they move in, they will likely rent out the old home while it is for sale. Advise Jerry.
3. Susie Widow was widowed 1 year ago. John has never married. They each own a home. Susie paid $240,000 when she bought her house 12 months ago. It is now worth $550,000. John bought his house 3 years ago for $200,000. John’s house is now worth $600,000. They would like to marry, sell their houses, and buy another new house, avoiding as much tax as possible. They also would like to get married as soon as possible. What do you advise?
4.Susan and Craig Hart married in April 1999 and will file a joint return. Before they married, each owned a condominium that each used separately as a principal residence for over two years. The condominiums were finally sold at a gain in June 1999.
5. Assume the same facts as in Problem 4, above, except that Susan lived in her parents’ home prior to marriage instead of in her own condominium.
6. On September 1, 1998, Al and Lisa Jackson purchase a townhouse in Boston for $450,000. Lisa receives an offer of employment in Atlanta, and on July 1, 1999, the Jacksons sell their townhouse for $480,000 and purchase a home in a suburb of Atlanta for $350,000.
7. Burne Dout and her husband Henry Gettic own a home in a coop housing project. They bought a the unit June 1, 1998, for $200,000. On May 1, 1999 she fell and broke her hip and had to go into a nursing home during her period of recovery. She was in the home for 5 months before finally moving back home. Although the doctor said it wasn’t necessary, Henry had a hot tub built for them to use during her recovery at home. The additions cost $10,000. But, he soon discovered he couldn’t take care of her in their home, because of the stairs. They sold their home on December 1, 1999 for $700,000.
8. Mimi and Harry were married in 1980. They decided to divorce in 2000. They had contracted to have a home built on December 1, 1998 and it was completed and they moved in April 1, 1999. They paid $350,000 for the home. Their divorce was final on May 1, 2000. The value of the house at that time was determined to be $450,000. Because they had minor children, the divorce decree provided that Mimi would keep the house until the kids were in college, and then the house would be sold and the proceeds split. The kids are now 12 and 10. What happens if the house is sold for $600,000 3 years later?
9. What if instead of getting a divorce in 9 above, the house falls off a cliff on May 1, 2000 and they replace the house with the insurance proceeds of 450,000 and 20,000 of their own money? They move into the new house on May 30, 2000. They sell the replacement house on December 30, 2001 for $600,000 because they are retiring.
10. John and Mary are 80 and 30. They marry and she moves into John’s house on their wedding date of June 1, 2000. He has owned the house since April 1, 1960. He paid $40,000, and it is worth $800,000 at the time of the wedding. He dies on the evening of June 1, 2000. She inherits the house and lives in it until April 1, 2001 and sells it for $850,000. What gain does she recognize?
11. What if in 10 above they had already contracted to sell the house on May 15, 2000? The executor carries out the sale.
12. What if taxpayer A creates a living trust, intending to avoid probate. He has transferred title to a trust which currently lists the kids as beneficiaries. He retains the right to change the beneficiary at any time, or to revoke the trust. But, before he changes anything, he dies. The trustee transfers the property to the kids, there is no probate, and they now have the property.