Han and Leia acquired a $1,475,000 lakefront home from Boba Fett Realty in 2010. They exchanged their principal residence, townhouse in Coruscant, for the Lake Tatooine property. They paid $700,000 in cash for the townhouse in 2007 and it was recently appraised for $1,400,000.

The gorgeous 30-acre lakefront property on Lake Tatooine has incredible views and vistas of the Dune Sea and the Greedo Mountains. In 2018 the Village of Mos Eisley valued the property at $2,150,000 and assessed real property taxes on the both the home and the outparcels of property. Jobba the Assessor determined that the home represented 30% of the value and the out-parcels represented the remaining 70% of the value for the property.

The Solos hired Storm and Trooper Construction Company (S&TCC) to repair and remodel the existing home. Force Architectural and Engineering was retained to perform feasibility and design for the renovation. However their investigation revealed a vermin infested and termite eaten home on the property that had been built a long, long time ago. Forces lead architect Yoda warned the Solos that the home was too old to be rehabbed and the cost prohibitive. It seems that the old lakefront home never really fit the Solos entertaining and galaxy trotting lifestyle. So they decided to demolish the home and built their dream stone and log cabin. In addition, they wanted a hanger and landing strip for the Millennium Falcon.

S&TCC estimated that it would cost $25,000 to $50,000 to demolish the home. All the necessary permits to demolish the home were obtained from the Village of Mos Eisley but Han balked at the cost of demolition. Han and Leia donated the home to the Mos Eisley Rebellion Fire Departments (MORFED) for a training exercise. On October 1, as part of fire prevention month, MORFED burned down the structure and then put out the fire. MORFED charged Han and Leia $2,000 to haul away the burned out remains of the old home.

A construction contract to built the home, a hanger with offices and a landing strip was signed with S&TCC on January 15, 2018. The cost of building the home is $1,250,000. They paid 20% of the cost in cash and borrowed the balance from the Next Empire and Republic Bank (NERB) with a construction bridge loan at 6.25% per annum secured by the property. Construction on the home was completed on August 20, 2018 and the Solos executed a 30-year home mortgage loan secured by the principal residence at 4.35% per annum with NERB on September 22, 2018.

Han and Leia have come to you for tax help for their 2018 tax year. What issues does their set of facts present to you as their tax advisor? What advice do you have for them? Please make any assumptions that you need in order to address and respond to the issues presented by the fact pattern. Clearly state the assumptions that you make. It is advisable to utilize a memorandum style in which you address the facts, issues, analysis and conclusions. Support your answers with cites to code, regulations, cases, rulings, IRS publications or other research data. Unsupported conclusions without proper analysis will not win you points with the firms senior partner (me). Good luck.