Question

For the scenario described (a. $20,000; $625,000), what is the recognized gain and the basis for the new office building in an involuntary conversion through condemnation?

A) Recognized gain: $20,000; Basis: $625,000
B) Recognized gain: $225,000; Basis: $625,000
C) Recognized gain: $20,000; Basis: $830,000
D) Recognized gain: $225,000; Basis: $830,000

Answer 1

The recognized gain in the scenario is $605,000 and the basis for the new office building is $20,000.

Step-by-step explanation:

The recognized gain and basis for the new office building in an involuntary conversion through condemnation can be determined by subtracting the basis of the converted property from the insurance proceeds received. In this scenario, the basis of the old office building is $20,000 and the proceeds received are $625,000. Therefore, the recognized gain is calculated as: $625,000 - $20,000 = $605,000.

For the basis of the new office building, the basis of the old property is added to any additional costs incurred to acquire or improve the new property. In this case, the basis of the old property is $20,000 and there are no additional costs mentioned. Therefore, the basis for the new office building is also $20,000.

So, the correct answer is: Recognized gain: $605,000; Basis: $20,000.