You are asked to write a memo
You are asked to write a memo to your client, Mr. Carterregarding his tax question.
● Your paper should not be more than 2-3 pages, double spaced ●The format should be as follows:
○ Restate the issue / question (first paragraph)
○ Explain the facts in relation to your research (middleparagraphs)
■ Cite a primary or authoritative material at least once ■ Referthe the tax form the information would be reported on
■ Include calculations and explanations
○ Give the client your final conclusion and recommendations(last paragraph)
Mr. Carter plans on selling his house located in Virginia in2018. He wants to know if he will be taxed on the gain of the sale.He is especially concerned because he had heard there may be a taxissue since he did not live in the house for a period of time.Please make sure you address this concern.
a) Mr. Carter believes the home will sell for at least$560,000.
b) He purchased the home in 1995 for $210,000.
c) Mr. Carter is not married, and files “single.”
d) In 2008, an addition was put on the house that cost$85,000.
e) From January 15, 2015 March 15, 2016, he moved in with hismother to care for her until she moved to a nursing home.
f) He moved to his Florida condo on November 1, 2017 and is nowa resident of Florida.
g) He rented the home to his niece from January 2015 until hemoved back home in March 2016. The income and expenses werereported on the Schedule E.
Answer:
Mr. Carter plans on selling his house located in Virginia in2018. As it is only residential property Mr. Carter has it will betaxation as capital Gain on sale of primary Residence. Also inaccordance with Virginia Capita gain taxation and exclusion rule hewill get deductions under section 121 if he qualified for it.
Under section 121, of internal revenue code, exclusion of tax onsale of primary residence a person qualified for exclusion if itsatisfied following conditions (Services, 2017) –
|
Section requirement |
Mr. carter status |
Remark |
|
The house being used for residential purpose for 2 out of 5years from the time of sale |
Sale year 2018 Reside in house – 2013 -2015 |
Qualify |
|
The house being own for 2/5 year from date of sale |
Own the house from 1995 |
Qualify |
|
Not used section 121 for exclusion of any other property |
Yes |
Qualify |
|
Married , then total exclusion of $500,000 |
Not |
Not Qualify |
|
Total exclusion |
$250,000 |
Qualify |
Calculation of capital gain from sale of Primary residence forMr. Carter
|
Particular |
Calculations |
Amount |
|
Sale consideration |
$560,000 |
|
|
Less Cost of house Addition Total |
$210,000 $85,000 |
$(295,000) |
|
Net |
$265,000 |
|
|
Exclusion u/s 121 |
(250,000) |
|
|
Net Capital gain |
$15,000 |
As in come from renting of house property is taxable underschedule E and it is duly taxed it will not be included here.Therefore Mr. Carter has to pay Capital gain tax of $ 15,000to theAuthority under schedule D Form 1040.
References
Services, I.r., 2017. Publication of house property. CapitalGain , 1(2), p.32.
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