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If the taxpayers sell the property - she may realize a gain or loss depending on circumstances.Fist step - to verify the basis.When the property was purchased - the basis is the original purchase price.Then - it is adjusted by purchase expenses and improvement expenses. - that is how we come up with the adjusted basis.The gain is calculated as (selling price) MINUS (adjusted basis) MINUS (selling expenses)
That gain is generally added to other taxable income.However when the taxpayer owned and used the property as a primary residence at least two out of last five years - section 121 allows to exclude the gain from taxable income - up to $250k for a single taxpayer.So based on your information - the homeowner woudl not qualify for that exclusion.
However - there are some additional exceptions from " two out of last five" tests.If you don't meet the eligibility test, you may still qualify for partial exclusion if you moved because of work, health, or an unforeseeable event.
You can qualify either by meeting a set of standard requirements (the “safe harbor” provisions) or by showing enough facts and circumstances to validate your claim.
see page 4 for details
If neither applies to your situation - the gain will be taxable, but because teh property was owned more than a year - it will be taxed at reduced long term capital gain rate - so depending on total taxable income - it might be taxed either at zero percent or at 15%.
Let me know if you need any clarification or help with determination.
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