Calculate the cost recovery

Jean’s home had a basis of $260,000 ($60,000 attributable to the land) and a fair market value of $250,000 when she converted half of it to business use by opening a bed and breakfast. Five years after the conversion, Jean sells the home for $375,000 ($75,000 attributable to the land).

a. Calculate Jean’s basis for gain, loss, and cost recovery for the portion of her personal residence that was converted to business use.

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b. Calculate the cost recovery deducted by Jean during the five-year period of business use, assuming the bed and breakfast is opened on January 1 of year 1 and the house is sold on December 31 of year 5.

c. What is Jean’s recognized gain or loss on the sale of the business-use portion?

The portion of Earl’s estate distributed to Robert, one of Earl’s beneficiaries, is valued as follows: Although the fair market value of the stock six months after Earl’s death turned out to be $60,000, the executor of the estate distributed it to Robert one month after Earl’s death when it was worth $85,000.

Determine Robert’s basis for the assets if:

a. The primary valuation date applies.

b. The executor elects the alternate valuation date.

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