Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until November 1 of year 1, when they sold the home for $500,000. The Pratts’ marginal ordinary tax rate is 35 percent. (Leave no answer blank. Enter zero if applicable.) Problem 14-40 Part d d. Assume the same facts as part (b), except that on December 1 of year 0 the Pratts sold their home in Seattle and excluded the $300,000 gain from income on their year 0 tax return. How much gain will the Pratts recognize on the sale of their Spokane home?

A. $100,000

B. $0

C. $187,700

Explanation:

A. Calculation to determine How much gain will the Pratts recognize on their home sale

Amount realized from the sale$500,000

Adjusted basis $400,000

Gain realized $100,000

($500,000-$400,000)

B. Based on the information given Pratts does not need to pay taxes on their gain on the sale of their home which in turn means that Pratts will recognize $0 gain on their home sale

C.Calculation to determine How much gain will the Pratts recognize on their home sale

Gain =$500,000 × 9 months/24= $187,500 months

Gain=$187,500

Therefore Pratt’s will exclude up to the amount of $187,500 of gain on their home sale

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