Essay Question 1
1. From the sale of his home in 2004, Melvin will incur a gain in the amount realized from the sale of his home, which exceeds his deferred basis in the home because the property was transferred to him incident to divorce. Furthermore, Melvin will be able to exclude the gain on the sale of his personal residence from his taxable income.
The rules pertaining to federal income tax and income tax deductions are governed by the
Internal Revenue Code (“the Code”). According to the Code, all income is taxable from whatever source derived unless otherwise excluded. Pursuant to the Code, income is defined as any economic benefit to the taxpayer or any clearly realized accession to wealth. Under this conceptualization of income, income can be in the form of cash or the fair market value of any property received. In the instant case, Melvin sold his principal primary residence. The amount realized for the sale of his home was $200,000 in cash and two paintings, each valued at
$50,000. Thus, his entire amount realized, consists of the total value, or $300,000.
Determining the amount realized is only the first step in determining what income will be taxable to Melvin in 2004. Next, because the disposition of property (receiving value for the sale of a home) is a capital gain, the amount of Melvin’s basis in the property must be subtracted from the amount realized to determine the amount of taxable income. A taxpayer’s basis in property is the amount of money paid for the property by the taxpayer when he/she acquired it and may be adjusted upward depending on the cost of any improvements made to the property.
In Melvin’s case, the home was transferred to him as part of a Property Settlement
Agreement with his ex-wife, Jane. The Code has special tax treatment for property transferred between divorcing spouses in connection with a settlement