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Taxation: involuntary conversion for a condemnation

Tax question: Review and comment on response.

1. Stallings' personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Stallings receives a condemnation award of $1,000,000. She uses the award to purchase anew residence for $1,150,000. The adjusted basis of the former residence was $1,100,000 at the date of condemnation. Determine Stallings' recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answer.

Student response:

The involuntary conversion of a principal residence is treated as a sale of the principal residence. Stalling has a realized loss on the condemnation of $100,000 (1,000,000-1,100,000). A realized loss on the sale or exchange of a taxpayer's personal residence is not deductible because of the restrictions on loss deductions for personal use assets. However, a realized gain from the sale or exchange of a personal residence is taxable under the all-inclusive income concept.

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Solution Preview


You have answered the question satisfactorily except for the basis in the new residence. The question is whether the basis in the replacement property is $1,000,000 or $1,100,000.

The basis ...

Solution Summary

The solution discusses the student response to the question about the tax consequences of condemnation of a personal residence including basis, reportable gain, cash received, loss.