Question

$50,000; $320,000. Amount realized $450,000 Adjusted basis (320,000) Realized gain $130,000 Amount realized $450,000 Less: Reinvestment (400,000) Deficiency $ 50,000 Since the amount of the deficiency of $50,000 is less than the realized gain of $130,000, the recognized gain is $50,000. The basis of the new building is calculated as follows: FMV $400,000 Less: Postponed gain (unrealized gain - recognized gain) (80,000) Adjusted basis $320,000

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017. On January 11, 2018, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $400,000 in a new office building on February 12, 2018, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?
a. $0; $400,000.
b. $0; $320,000.
c. $130,000; $400,000
. d. $50,000; $320,000.
e. None of these choices are correct.

Answer 1

The recognized gain is $50,000 and the basis for the new building is $320,000, as the deficiency after reinvestment is less than the realized gain leading to a recalculation of the basis by deducting the unrealized gain from the FMV of the new building.

Step-by-step explanation:

The recognized gain and the basis of the new building in this scenario involving an involuntary conversion under Section 1033 can be determined by first calculating the realized gain, which is the amount realized from the insurance minus the adjusted basis of the destroyed building. In this case, the realized gain is $150,000. Then we consider the reinvestment of $400,000 in a new building which is $50,000 less than the amount realized from the insurance. Because this deficiency is less than the realized gain, only the deficiency amount is recognized. The basis of the new building is then calculated by subtracting the unrealized gain (realized gain - recognized gain) from the fair market value of the new building. Therefore, the correct answer is d. $50,000; $320,000.