Question

None of these choices are correct. Amount realized ($490,000 - $34,000) $456,000 Adjusted basis (95,000) Realized gain $361,000 § 121 exclusion (250,000) Recognized gain $111,000 The adjusted basis of the inherited residence is the fair market value at the date of the decedent's death, $345,000, increased by the capital expenditures of $85,000 for a total of $430,000.

Samantha inherits a home on July 1, 2017, that had a basis in the hands of the decedent at death of $180,000 and a fair market value of $345,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for nine years, with an adjusted basis of $95,000 and move into the inherited home. On September 16, 2017, she sells the old residence for $490,000. Samantha incurs selling expenses and legal fees of $34,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $85,000. These additions are completed and paid for on November 1, 2017. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?
a. $111,000; $265,000. b. $0; $180,000. c. $361,000; $430,000. d. $361,000; $265,000. e. None of these choices are correct.

Answer 1

Samantha's recognized gain on the sale of her old principal residence is $111,000 after the § 121 exclusion. Her basis in the inherited home is $430,000, calculated as the fair market value at the decedent's death plus capital improvements.

Step-by-step explanation:

The recognized gain on the sale of Samantha's old principal residence and her basis in the inherited home must be calculated correctly. Samantha sold her old residence for $490,000 and had selling expenses and legal fees amounting to $34,000, which brings her amount realized down to $456,000. Her adjusted basis for the old residence was $95,000. Subtracting the adjusted basis from the amount realized gives us a realized gain of $361,000. Since the residence was her principal property and she owned and used it for at least two out of the last five years, she qualifies for the § 121 exclusion of $250,000, reducing her recognized gain to $111,000.

As for the basis in her inherited home, since she inherited the property, her basis is the fair market value at the date of the decedent's death, which is $345,000, plus the $85,000 in capital expenditures for the pool and other additions, totaling $430,000. Therefore, the correct answer is her recognized gain is $111,000 and her basis in the inherited home is $430,000, which corresponds to option c.