Patrick inherited his mother's house.The house cost his mother $45,000 and was valued at the date of her death at $325,000.Patrick spent $20,000 adding new carpet and improvements to the house.He rented the house for several years and deducted $35,000 for depreciation.Patrick then sold the house for $355,000.He paid $22,000 in selling costs.What is the gain or the loss on the sale of the home?

Question

Quizplus · Accepted Answer

The basis for Patrick's inheritance of the house is the fair market value at the time of his mother's death, which is $325,000. Patrick's adjusted basis is the sum of his mother's basis and the improvements he made to the house, which is $45,000 + $20,000 = $65,000. The depreciation deduction does not affect his adjusted basis for purposes of calculating gain or loss on the sale.

Patrick's proceeds from the sale are $355,000, less selling costs of $22,000, for a net amount of $333,000. To calculate his gain or loss, we compare his net amount to his adjusted basis:

Gain or Loss = Net Amount - Adjusted Basis
Gain or Loss = $333,000 - $65,000
Gain or Loss = $268,000

Since Patrick's gain is positive, he has a taxable gain on the sale. The answer is not A because a loss is not possible given the information provided. The answer is not C because the gain is $268,000, not $45,000 (which was his mother's original basis). The answer is not D because the gain is $268,000, not $303,000 (which would have been the gain if we ignored Patrick's adjusted basis). The answer is B because Patrick's gain is $268,000, which is a $23,000 gain over his adjusted basis of $245,000 ($325,000 - $80,000).

Patrick Inherited His Mother's House