Question

vera owns an office building that she leases to tenants. if the building is destroyed by a tornado, is the functional use test or the taxpayer use test applied as to replacement property?

Answer 1

The functional use test is typically applied to Vera's situation, as her office building is considered property held for productive use in a trade or business. The taxpayer use test is for personal use property, which is not relevant for a rental property used for business purposes.

Step-by-step explanation:

When Vera owns an office building that she leases to tenants and it is destroyed by a tornado, determining which property is considered as replacement property is guided by IRS rules, specifically under Section 1033 of the Internal Revenue Code which addresses involuntary conversions. The main issue is to decide whether the functional use test or the taxpayer use test is applied. In most cases, the functional use test is applied to properties held for productive use in a trade or business or for investment, which seems to be the case with the office building, as it is an income-producing property. The replacement property must be similar or related in service or use to the property it replaces. The taxpayer use test is generally used for personal use property, which is not applicable in Vera's situation where the property is used in a business capacity.