Tax question: Review and comment on response.
Stallings' personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Stallings receives a condemnation award of $1,000,000. She uses the award to purchase anew residence for $1,150,000. The adjusted basis of the former residence was $1,100,000 at the date of condemnation. Determine Stallings' recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answer.
Response:
The involuntary conversion of a principal residence is treated as a sale of the principal residence. Stalling has a realized loss on the condemnation of $100,000 (1,000,000-1,100,000). A realized loss on the sale or exchange of a taxpayer's personal residence is not deductible because of the restrictions on loss deductions for personal use assets. However, a realized gain from the sale or exchange of a personal residence is taxable under the all-inclusive income concept.