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$|$Tax $599$

Memorandum $1$

A and $B$ are married and file a joint return. They sold their home$/$primary residence on September $1,2024$ for $$780,000.$ A had purchased the home on January $1,{2023}_{?}$ for $$260,000$ and rented it for $4$ months $($January $-$ April$).$ A and B married on May $1,2023$ and immediately moved into the home. They decided to sell the residence after deciding to adopt $3$ children and needing a larger home. During $2023,$ B operated a business form the home and claimed $$5,000$ as a depreciation deduction for the office used in the home on their $2023$ joint federal income tax return. A depreciation deduction of $$4,000$ was also taken on Schedule E for the rental activity for their $2023$ joint federal income tax return.

Provide an analysis of the amount of gain recognized $($if any$)$ A and $B$ should report on their $2024$ joint federal income tax return. Please include in your analysis any additional information we may need from the client and explain why$/$how that information may be relevant to your conclusion. Also address any adjustments to the computation to account for the home office and$/$or rental use of the home.

For purposes of this Memorandum make sure to include research sources from the applicable code section, regulations and administrative guidance including private letter rulings. A good place to start: Section $121$ of the Internal Revenue Code Section provides:

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