Question: Lylah, Bentley, Westin and Braxton inherited a home upon the death of their grandfather in 2016. The FMV of the property on the date of death was $100,000. Lylah bought out Bentley, Westin and Braxton for $20,000 each in 2016 by obtaining a bank loan. Lylah lived in the home as her principal residence until 2020 when the bank foreclosed on the property. She received a Form 1099-A with a debt outstanding of $45,000 and FMV of $80,000. She is personally liable for the outstanding debt. Can Lylah use the §121 exclusion to report the sale of the home, and what is her sales price?
Answer: Yes, Lylah can use the §121 exclusion since she owned and used the home as her principal residence for a period from 2016-2020. She meets the ownership and use test for two out of the five years before the sale.
Since Lylah is personally liable for the repayment of the debt, her deemed sales price when reporting the sale on the Form 8949, Schedule D is $45,000. Since this loan was recourse debt, the selling price of the home was the lessor of the FMV or the balance of the principal outstanding reported on the Form 1099-A. Her basis in the home is $85,000 ($25,000 + $60,000). Since her basis exceeds the sales price, she has a nondeductible loss on the foreclosure sale of her home.
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