Iris's personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Iris receives a condemnation award of $1,000,000. She uses the award to purchase a new residence for $1,150,000. The adjusted basis of the former residence was $1,100,000 at the date of the condemnation. Determine Iris's recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answers.
What will be an ideal response?
Iris's realized loss of $100,000 ($1,000,000 - $1,100,000) is a personal-use loss. Following the business-purpose concept, personal-use losses are not recognized. No legislative grace is applied to condemnations of personal residences. Accordingly, a loss on the condemnation of a personal residence is not recognized. The basis of the new residence is the cost of $1,150,000. Since no deferral or recognition occurred, no adjustment to replacement basis occurs.
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