Sale of Principal Residence

[RWG1950]

Retired customers (MFJ) called & said they are about to sell their long time residence for about $1,000,000 and move into a small condo.
They had deferred gain of about $60K from their prior residence in 1996 when they bought this one for $280K.
They figure they may have a LTCG on this sale of between $200-250K. My understanding of how the gain is calculated :
Sales price
- selling costs
- original purchase price & allowable acquisition costs (minus the prior deferred 60K gain)
- capital improvements made over the years
- $500K exclusion
= long term capital gain
In an ordinary year their AGI would be about $100K. They haven't given me any figures yet, but it would seem AMT & NIIT may play into this.
I do very few returns of this type & wondered if there is anything I'm not taking into account.
Thanks for comments.

[Uncle Sam]

"They had deferred gain of about $60K from their prior residence in 1996 when they bought this one for $280K."
That doesn't make sense. That was the PRIOR rule before the Tax Reform Act of 1986 came around.

[TaxGuyBill]

"They had deferred gain of about $60K from their prior residence in 1996 when they bought this one for $280K."
That doesn't make sense. That was the PRIOR rule before the Tax Reform Act of 1986 came around.

No, the $250,000/$500,000 exclusion came about in 1997. So 1996 still had the deferral.

So unless there were other adjustments to Basis (such as casualty losses or depreciation) or the house was not always their principal residence, RWG's comments results in the taxable gain.

[New York Enrolled Agent]

"
That doesn't make sense. That was the PRIOR rule before the Tax Reform Act of 1986 came around.

TGB is spot-on. Section 312 of TRA of 1997 changed section 121. It was effective for sales after May 6, 1997 - that's why we have to recognize any gain due to possible depreciation measured from that date on the sale of the residence.

[Beersheba]

Confused. At issue is the $60K deferral of profit. The distinction between 1996 and 1997 has been discussed for purposes of depreciation.but I haven't read anything about what happened to the $60K deferral.

Uncle Sam does in fact discuss the $60K deferral as being a non-factor resulting from the 1986 tax law. If this is true, it would appear anything that happened in 1996 or 1997 would not cause the $60K deferral to be calculated in today's LTCG situation.

[RWG1950]

Prior to the 5-6-97 $250/500 exclusion becoming effective, for many years there had been another policy in place to defer tax on some of the
profit of the sale of a principal residence. If I recall this correctly, a person could elect to defer up to $125K of profit from the sale of their home
if they purchased a replacement principal residence of equal or greater value within a two-year replacement period.
The amount deferred, reduced the cost basis of the replacement principal residence, $60K in this instance.

[TAXNJ]

Prior to the 5-6-97 $250/500 exclusion becoming effective, for many years there had been another policy in place to defer tax on some of the
profit of the sale of a principal residence. If I recall this correctly, a person could elect to defer up to $125K of profit from the sale of their home
if they purchased a replacement principal residence of equal or greater value within a two-year replacement period.
The amount deferred, reduced the cost basis of the replacement principal residence, $60K in this instance.

Yes, see links below for information (better known as “the Over-55 Home Sale Exemption”)

https://www.irs.gov/pub/irs-prior/p523--1996.pdf

https://www.investopedia.com/terms/d...le-of-home.asp

[Beersheba]

Thanks for clearing this up. Abundant cites to support $60K basis reduction. If this was a personal residence all this time, there shouldn't have been any depreciation.