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 excluded gain
attributable to the relinquished business 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
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
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.