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Karen, a professional carpenter, is a sole proprietor who constructs and sells luxury homes to customers. In Year One, Karen paid the following costs in connection with the construction of Blackacre Estates, a luxury home built for sale as part of her construction business:

$5,000 for temporary scaffolding that will be discarded upon completion of construction

$5,000 in nuts, bolts, nails, screws, washers, and fasteners

$10,000 for concrete used to form the homes foundation

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$20,000 in depreciation on Karens construction equipment (forklift and loader)

$50,000 for insurance coverage during construction in case of loss or damage resulting from fire, storm, or other casualty

$150,000 for various appliances and cabinetry installed in the home

$200,000 in wages paid to Karens employees who assist in the homes construction

$400,000 for the land on which the home is constructed

(a) Assuming all of the foregoing costs are ordinary and necessary in the construction of a luxury home, which of the costs may be deducted in Year One?

(b) Assume Karen incurs no additional costs in connection with the construction of Blackacre Estates. If Karen sells Blackacre Estates to a customer in Year Two for $1,500,000, what are the federal income tax consequences to Karen?

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