Paula inherits a home on July 1, 2017 that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2017, she sells the old residence for $600,000. Paula incurs selling expenses of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2017. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?
A)$0; $500,000.
B)$193,000; $600,000.
C)$443,000; $600,000.
D)$475,000; $600,000.
E)None of the above.

Question

Quizplus · Accepted Answer

To calculate the recognized gain on sale of old residence, we need to compare the adjusted basis ($125,000) with the selling price minus selling expenses ($600,000 - $30,000 - $2,000 = $568,000).

Since the selling price is greater than the adjusted basis, the recognized gain is $568,000 - $125,000 = $443,000.

The basis in the inherited home is the fair market value at the date of the decedent's death ($500,000), which is greater than the basis of the old residence. Adding the cost of improvements ($100,000) we get a total basis of $600,000. Therefore the basis in the inherited home is $600,000.

There is no recognized gain on the sale of the old residence because Paula owned and occupied the residence as her principal residence for at least 2 years within the 5-year period ending on the date of sale. Therefore, she is entitled to exclude up to $250,000 ($500,000 if filing jointly) of the gain on the sale of her old residence under the primary residence exclusion rule.

Paula Inherits a Home on July 1, 2017 That Had