Paula inherits a home on July 1, 2012, 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, 2012, 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, 2012.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 her old principal residence, we need to subtract the adjusted basis from the selling price and subtract any selling expenses and legal fees. Thus:

$600,000 (selling price) - $125,000 (adjusted basis) - $30,000 (selling expenses) - $2,000 (legal fees) = $443,000

Therefore, the recognized gain on the sale of her old principal residence is $443,000.

The basis of the inherited home is stepped up to the fair market value at the date of the decedent's death, which is $500,000. When Paula adds the pool, deck, pool house, and recreation room at a cost of $100,000, this amount is added to her basis. Therefore, her new basis in the inherited home is:

$500,000 (fair market value at the date of the decedent's death) + $100,000 (cost of improvements) = $600,000

Therefore, her basis in the inherited home is $600,000.

Paula Inherits a Home on July 1, 2012, That Had