Our client, Mr & Mrs Ricardo, have made $3,000 worth of improvements to their house bought in 2010,
with original cost of $446,000 that increased their adjusted basis by $3,000 in 2011. In January of the
current year, they moved into a new home and sold the old house to an unrelated person for $448,000.
The client has asked us to research the tax consequences of the sale and the amount of gain or loss they
should recognize in gross income on the sale.
1. The amount of gain or loss that should be realized
2. If there is a realized gain whether Mr. & Mrs. Ricardo meet the ownership and usage requirement
for principal residence for the gain to be excludable
3. If there is a realized loss, whether it would be deductible.
1. IRC 1001(a) gain from the sale of property shall be the excess of the amount realized over the
adjusted basis and the loss shall be the excess of the adjusted basis over the amount realized.
2. IRC 121(a) states that if the property has been owned and used by the taxpayer for two out of
the last five years then it is the principal residence of the taxpayer.
3. IRC 121(2)(A)gain from sale of principal residence is excludable but limited upto $500,000 for
joint return, if- (i) either spouse meets the ownership requirements of subsection (a) with respect
to such property (ii) both spouses meet the use requirements of subsection (a) with respect to
such property; and (iii) ) neither spouse is ineligible for the benefits of subsection (a) with respect
to such property by reason of paragraph (3) (application of one sale or exchange every two
4. IRC 165-9(a) Losses not allowed. A loss sustained on the sale of residential property purchased
or constructed by the taxpayer for use as his personal residence and so used by him up to the
time of the sale is not deductible
In regards to IRC 1001(a) the calculation of $(446,000+3,000-448,000= 1,000) results to a $1,000 of
realized loss as it is the excess of the adjusted basis over the amount realized. Since Mr. & Mrs. Ricardo
has purchased the house in 2010 and is assumed to have lived there till the sale of the house, in absence
of information otherwise. According to IRC 121(a) the old house is qualified as the client’s principal
residence as they both have satisfied the ownership and usage (living in the house for two of the last five
years) requirements. The provision of IRC 165-9(a) does not allow losses on personal residence used by
the taxpayer up to the time of the sale non deductible, thus the $1,000 of realized loss is not recognized
and so is non deductible in Mr & Mrs Ricardo’s tax return.
A loss of $1,000 should be realized on the sale of the house below the adjusted basis. However, the loss
is not recognized on principal residence resulting it to be non deductible in the return.
Our client, Mr. Ricardo, is considering retiring and moving his family to California as of 2019. Moving
expenses are estimated at $12,000-$15,000. The client wishes to know whether these expenses would
1. Does the client qualify for the moving expense deduction?
2. As of 2018, the moving expense deduction will be temporarily repealed until 2025. What would be
the impact if the client delayed their retirement until the deduction was reinstated?
Per IRC 217(i), in the case of any qualified retiree moving expenses, IRC 217 (other than subsection (h) )
shall be applied with respect to such expenses as if they were incurred in connection with the
commencement of work by the taxpayer as an employee at a new principal place of work located within
the United States. “Qualified retiree moving expenses” are defined as those which are incurred by an
individual whose former principal place of work and former residence were outside the United States, and
which are incurred for a move to a new residence in the United States in connection with the bona fide
retirement of the individual.
Analysis and Conclusion
Based on the criteria defined in IRC 217(i), the client’s moving expenses do not meet the definition of
“qualified retiree moving expenses”, as the client’s principal place of work and current residence is with in
the United States. Under these circumstances, consideration of the deduction’s temporary repeal is moot
as the client does not qualify in any case. In order to the client’s moving expenses to be deductible, he
must not incur them prior to January 1st, 2026 (RIC 217(k)), and, upon moving must fulfill the employment
requirements set forth under RIC 217(c)(2).
Purchase answer to see full attachment