Question

Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the building was 210,000, and its FMV was330,000. Ron filed an insurance claim and was reimbursed 300,000. In that same year, Ron invested240,000 of the insurance proceeds in another business building. What is the adjusted basis of the new business building?

1) $60,000
2) $150,000
3) $210,000
4) $240,000

Answer 1

The adjusted basis of Ron's new business building is $150,000. This is calculated by subtracting the amount of the insurance reimbursement not reinvested from the adjusted basis of Ron's destroyed building.

Step-by-step explanation:

The adjusted basis of Ron's new business building is determined by deducting the insurance reimbursement not used in the purchase of the replacement property from the adjusted basis of the destroyed property. In this case, Ron's adjusted basis in the destroyed building was $210,000 and he was reimbursed $300,000 by the insurance. He then invested $240,000 of the insurance proceeds into a new business building.

To calculate the adjusted basis of the new building, you take the adjusted basis of the old building and subtract the difference between the insurance reimbursement and the amount reinvested:

Adjusted basis of the old building: $210,000
Insurance reimbursement: $300,000
Amount reinvested: $240,000

Difference not reinvested: $300,000 - $240,000 = $60,000

Therefore, the adjusted basis of the new building would be the adjusted basis of the old building minus the difference not reinvested:

Adjusted basis of the new building = $210,000 - $60,000 = $150,000