Paula inherits a home on July 1,2015 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 16,2015,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 1,2015.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 the sale of the old principal residence, we need to first determine its adjusted basis, which is $125,000. The selling expenses and legal fees are deductible from the sales price, leaving the net sales price to be $568,000 ($600,000 - $30,000 - $2,000). Therefore, the recognized gain is $443,000 ($568,000 - $125,000).

Paula's basis in the inherited home is the fair market value at the date of the decedent's death, which is $500,000.

The cost of the additions to the inherited home cannot be included in the basis because they are considered improvements, not repairs. However, they can be added to the basis and depreciated if the inherited home is used for business or rental purposes in the future. As there is no mention of this in the question, we do not need to include this information in our answer.

Paula Inherits a Home on July 1,2015 That Had a Basis