Paula inherits a home on July 1,2013,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 16,2013,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 1,2013.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

The selling price of the old principal residence is $600,000 and the adjusted basis is $125,000. Therefore, the recognized gain is $475,000 ($600,000 - $125,000) and after deducting selling expenses and legal fees, the taxable gain is $443,000.

The basis of the inherited home is its fair market value at the date of the decedent's death, which is $500,000. After adding the cost of the improvements, the adjusted basis becomes $600,000. There is no recognized gain on the inherited home since Paula did not sell it.

Paula Inherits a Home on July 1,2013,that Had a Basis