I:12-45 Sale or Other Disposition of a Principal Residence. In 1971, Mr. and Mrs. Self purchased their first principal residence for $80,000. In 1996, they sold the house for $300,000 and purchased a new residence for $1.5 million. At that time, the Selfs were allowed to defer the $220,000 gain because they purchased a more expensive residence, but the basis of the residence was reduced by the gain deferred. The Taxpayer Relief Act of 1997 eliminated this deferral provision and made it easier for taxpayers who sell a principal residence to exclude the gain resulting from the sale even if they do not purchase a replacement residence.

In 2005, the Selfs spent $200,000 to add a porch to their house that overlooks the small pond behind their house. In 2008, they hired painters to paint the entire house at a cost of $18,000. They estimate that $20,000 has been spent on routine repairs since 1996.

Insurance of $11,000 was collected for other repairs resulting from a small tornado in 2012. No casualty loss deduction was allowed. They hold the residence as joint tenants.

a. What is the current adjusted basis of the house?

b. Mrs. Self is an employee of Bulldog Consulting and has a nice office on the business premises; however, she finds it helpful to use one of the bedrooms as an office to do work in the evenings and on weekends. May the Selfs claim a deduction for depreciation?

c. Determine their recognized gain and character if they sell the house today for $2.8 million.

d. If the property is owned by Mrs. Self instead of owned jointly, determine their recognized gain and character if they sell the house today for $2.8 million.

e. If the property is owned by Mrs. Self instead of owned jointly and Mr. Self dies, will the basis of the house be increased?

f. Determine their recognized gain if they exchange the house today for an apartment complex valued at $2.8 million. The Selfs will purchase another house and hire someone to manage the apartment complex.
g. If the house is destroyed by a fire when its FMV is $2.8 million and the Selfs receive $2.6 million, determine their casualty loss deduction and gain recognized, if any. The Selfs do not plan to purchase another residence.
h. If the Selfs want to purchase another principal residence after collecting the insurance in part g. above, what is the minimum amount they would have to pay for the new residence to avoid recognizing any gain?