Excluded Gain

Excluded Gain

Excluded gain is gain realized on a sale that will never be taxed. The most common situtation in which this occurs is for qualifying sales of principal residences. Other gains that may be excluded in whole or in part are gains on section 1202 stock, gains on qualified small business stock, and gains on certain property owned by businesses operating in renewal communities.
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Furthermore, none of the excluded gain is subject to the alternative minimum tax.
The IRS concluded in a Chief Counsel Advice memo (CCA) that excluded gain from the sale of a former principal residence that was converted to rental property is not an item of passive activity gross income and, as such, does not offset any suspended passive losses upon disposition of the property.
Further, a portion of the excluded gain is a tax preference item, so the benefit of the exclusion may be further reduced; for QSB stock sales or exchanges after May 5, 2003, 7% of the excluded gain is deemed a tax preference item and added back to taxable income in calculating alternative minimum taxable income.
In determining the replacement business property's basis, excluded gain is treated as gain recognized by the taxpayer.
The excluded gain under section 121 can be included in the basis of the replacement property.
121(c), a reduced maximum exclusion is available if a taxpayer sold or exchanged property owned and used as his principal residence for less than two of the preceding five years or excluded gain on a principal residence within the preceding two years.
3) If a joint return is filed for the sale year, up to $500,000 of the gain may be excluded, if (1) at least one of the spouses owned the property for two of the five years prior to its sale, (2) both spouses used it as their principal residence for two of the five years prior to its sale and (3) neither spouse excluded gain under Sec.
If the seller reacquires a principal residence and had excluded gain under section 121 or had deferred gain under section 1034, no gain or loss is reported on the repossession, provided the property is sold within one year.
The period between the date of a prior sale or exchange of property for which the taxpayer excluded gain under Sec.
Moreover, 50% of the excluded gain will be a preference item for AMT purposes.
Each meets the ownership and use tests and each has a $250,000 excluded gain and a $20,000 included gain on their individual returns for the year of sale.