Elizabeth Smart’s personal residence is condemned as part of the urbanization en

Question

Elizabeth Smart’s personal residence is condemned as part of the urbanization enlightened project. Her adjusted basis of the residence is $485,000. She receives condemnation proceeds of $465,000, and invests the proceeds in stocks and bonds. (a): Calculate Elizabeth’s realized and recognized gain or loss. (b): If the condemnation proceeds are $510,000, what is Elizabeth’s realized and recognized gain or loss? (c): What are Elizabeth’s realized and recognized gain or loss in (a) above if the house was a rental property?

Explanation / Answer

The adjusted basis of residence is B = $485,000

PART A

If the condemnation proceeds are $465,000 which is less than the basis Elizabeth makes a loss

Loss = 465,000-485,000 = -$20,000

PART B

The proceeds are $510,000 which is greater than $485,000. Thus Elizabeth makes a gain.

Gain = 510,000-485,000 = $25,000

PART C

IF the property is rental property then the basis continues to reduce by the rental income and thus the gain would go on increasing. Since the rental income is not given we cannot find the gain.

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