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Discussion:Gain on sale of principal residence

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Discussion Forum Index --> Tax Questions --> Gain on sale of principal residence

Kit (talk|edits) said:

21 November 2005
Is there a new 'extended Section 121' where gain in excess of the excluded amount can be deferred in the like kind exchange?

BCG CPA (talk|edits) said:

22 November 2005
New Revenue Procedure 2005-14 addresses this particular topic.

Here's an example:

Dubya buys a house for $ 225,000 that he uses as his principal residence from 2000 to 2003. From 2003 to 2005, Dubya rents the house to tenants and claims depreciation deductions of $ 25,000. In 2006, Dubya exchanges the house for $ 20,000 in cash and a condo with a fair market value of $ 475,000 that he intends to rent to tenants. Dubya realizes a gain of $ 295,000 [495,000 ($ 475,000 + $ 20,000) less $ 200,000 ($ 225,000 - $ 25,000)] upon exchanging the property. Since the house is investment property at the time of the exchange Dubya may defer gain under Code Section 1031.

Dubya applies Code Section 121 to exclude $ 250,000 of the $ 295,000 gain before applying the nonrecognition rules of Code Section 1031. He may defer the remaining gain of $ 45,000, including the $ 25,000 gain attributable to depreciation expense. Even though Dubya received $ 20,000 of cash (boot) on the exchange, he is not required to recognize gain because the boot is less than the excluded gain. Proof:

Amount Realized $ 495,000 Less: Adjusted Basis < 200,000> Equals Realized Gain $ 295,000 Less: Gain excluded under Code Sec. 121 < 250,000> Gain to be Deferred $ 45,000

Dubya's basis in the replacement property is $ 425,000, which is equal to the basis of the relinquished property, $ 200,000, increased by the exluded gain, $ 250,000, reduced by the cash received, $ 25,000.

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