Question

Abby's home had a basis of $360,000 ($160,000 attributable to the land) and a fair market value of $340,000 ($155,000 attributable to the land) when she converted 70% of it to business use by opening a bed-and-breakfast. Four years after the conversion, Abby sells the home for $500,000 ($165,000 attributable to the land). a. Calculate Abby's basis for gain, loss, and cost recovery for the portion of her personal residence that was converted to business use. If an amount is zero, enter "0". House Land Gain basis $ $ Loss basis $ $ Cost recovery basis $ $ 0 Feedback b. Calculate the cost recovery deducted by Abby during the four-year period of business use, assuming that bed-and-breakfast is opened on January 1 of Year 1 and the house is sold on December 31 of year 4. Assume that the cost recovery percentages are 2.461% in Year 1 and 2.564% in Years 2–5. Round your computations and the final answer to the nearest dollar. The total cost recovery for the four-year period is $ . Feedback c. What is Abby's recognized gain or loss on the sale of the business use portion? Abby's recognized gain on the sale of the business-use portion of the house is $ , and her recognized gain on the business-use portion of the land is $ .

Answer 1

a.
				House	Land
	Abbys basis for gain			140000	112000
				(360000-160000)*0.7	(160000*0.7)
	Abbys basis for loss			129500	108500
				(340000-155000)*0.7	(155000*0.7)
	Cost recovery basis			129500	0
b.	Cost recovery :
	Year
	1	(129500*2.461%)		3186.995
	2 to 4	(129500*2.564%*3)		9961.14
				13148
c.	Abby's recognized gain on the sale of the business-use portion of the house=(500000-165000)*0.7-140000=$ 94500
	recognized gain on the business-use portion of the land=(165000*0.7)-112000=$ 3500