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
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.