Ellie Executive lives in Florida with her family in a home bequeathed to her by her parents when they passed away. This year her employer assigned her to a position in London. The assignment is for a minimum of four years. Because she grew up in the house, Ellie would like to keep it and rent it out. There is no mortgage on the home, so renting will create a positive cash flow situation for her. Her employer will be providing her with a housing allowance to cover her London housing costs. Ellie believes the house has a fair market value of at least $500,000. Ellie wants to make sure that if she ends up selling it, she will not have any taxable income from the sale. She has asked for your guidance.
After talking with Ellie Executive further, you become aware of the following additional facts: Ellie is not certain what she and her husband will do at the end of the four-year London assignment. She may return to Florida but she also might take another international assignment, since her children are now adults. Ellie plans to continue paying the following expenses while the house is rented:
* $400 a month for a weekly gardener
* $500 a month for a weekly housecleaner
* Approximately $200 a month in utility and maintenance expenses (electricity, garbage, and water)
Ellie anticipates that she can lease the house fully furnished for $2,500 a month. Ellie's parents died in 1991 when the fair market value of the house was $300,000. They purchased the house in 1950 for $10,000. Her parents spent a total of $20,000 in home improvement costs. Ellie substantially redecorated the house in 1992, spending $65,000 in renovating two bedrooms, two bathrooms, and replacing the roof. In addition, Ellie paid $5,000 for a new perimeter fence and $10,000 to a landscape architect to redesign the yard.
a. Do the Treasury regulations provide further guidance in this situation?
b. Do the Treasury regulations help to refine or add to the initial research question?
c. Do the regulations adequately address the research question? If so, what are your conclusions, and on what are they based?