Paula inherits a home on July 1, 2018 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, 2018, 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, 2018. 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

First, let's calculate Paula's gain on the sale of her old principal residence:

Sales price: $600,000 
Adjusted basis: $125,000 
Selling expenses: $30,000 
Legal fees: $2,000

Total amount realized: $632,000

Gain: $632,000 - $125,000 - $30,000 - $2,000 = $475,000

This gain is below the exclusion amount ($250,000 for a single taxpayer), so Paula can exclude the entire amount from her taxable income. Therefore, her recognized gain is $0.

Next, let's calculate Paula's basis in the inherited home:

The basis is stepped up to the fair market value at the date of the decedent's death, which was $500,000. Paula also paid $100,000 for the additions, so her basis in the inherited home is $600,000.

Therefore, the answer is B: $193,000 recognized gain on the sale of the old principal residence, and $600,000 basis in the inherited home.

Paula Inherits a Home on July 1, 2018 That Had