SEE-1 - Income and Assets (20% of the exam) - Section 2.2

Calculate gain or loss on property dispositions including basis determination, short- versus long-term capital gains, and the personal residence exclusion.

Calculate adjusted basis, realised gain or loss, and the holding period for property dispositions, applying the preferential long-term capital gains rates once an asset has been held more than one year. Apply the Section 121 exclusion of up to $250,000 ($500,000 married filing jointly) on a principal residence, and identify the ownership and use tests.

Capital gainsAdjusted basisSection 121 exclusionProperty transactions

Practice question for this objective

Free sampleIncome and Assetshard

Gerald and Naomi Fitzpatrick, who file a joint return, sold their main home in 2024 after owning and living in it as their principal residence for the full preceding six years. They had purchased it for 310,000 dollars and added a 60,000 dollar extension and new roof. The sale price was 1,050,000 dollars and they paid 50,000 dollars in selling expenses. Applying the principal-residence gain exclusion, how much of their gain is taxable?

A190,000 dollars
B380,000 dollars
C180,000 dollars
D130,000 dollars Correct

Apply the Section 121 exclusion to a joint return by computing realised gain first, then subtracting the 500,000 dollar married-filing-jointly exclusion. A married couple filing jointly who both satisfy the two-of-five-year ownership and use test may exclude up to 500,000 dollars of gain on a principal residence; only realised gain in excess of that amount is taxable, after basis is adjusted for improvements and the amount realised is net of selling expenses.

Why A is wrong: This applies the correct 500,000 dollar joint exclusion but omits the 60,000 dollar improvement from basis, giving a gain of 690,000 and a taxable figure of 190,000. Capital improvements must be added to basis before computing gain.

Why B is wrong: This computes the gain correctly as 630,000 but applies the 250,000 dollar single exclusion instead of the 500,000 dollar amount available to a married couple filing jointly who both meet the use test.

Why C is wrong: This applies the 500,000 dollar joint exclusion but fails to reduce the amount realised by the 50,000 dollars of selling expenses, producing a gain of 680,000. Selling expenses reduce the amount realised.

Why D is correct: Adjusted basis is 310,000 plus 60,000, or 370,000. The amount realised is 1,050,000 minus 50,000, or 1,000,000. Gain is 630,000, and after the 500,000 dollar joint exclusion the taxable gain is 130,000.

See more SEE-1 practice questions, answers explained.

Exam traps in Income and Assets

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-1 bank for this domain.

14 June 2024, because the holding period begins on the purchase date and a sale exactly one year later is long-term
Why it is wrong: This counts the purchase day itself and treats a holding of exactly one year as long-term; the day of acquisition is excluded, and exactly one year is not more than one year, so this is too early.
135,000 dollars
Why it is wrong: This adds the 35,000 dollar improvement to basis but forgets to reduce the amount realised by the 22,000 dollars of selling expenses, giving 410,000 minus 275,000. Selling costs must be subtracted from the sale price when computing the amount realised.
0 dollars
Why it is wrong: This assumes the entire gain is excluded, but the 280,000 dollar gain exceeds the 250,000 dollar single-filer cap, so the 30,000 dollar excess remains taxable.

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