Question

Jacob is a farmer, and the state condemns land that belongs to him. The condemned land cost 150,000, but the state pays him 160,000. His farm as a whole is worth 300,000. Shortly after receiving the 160,000, Jacob buys more land for 160,000. What is Jacob's taxable income?

1) 10,000
2) 150,000
3) 300,000
4) 0
5) 160,000

Answer 1

Jacob's taxable income is 4.$0 because he reinvested the entire compensation received from the condemnation into buying new land, potentially qualifying for nonrecognition of gain under IRS Section 1033.

Step-by-step explanation:

Jacob is a farmer whose land was condemned by the state. The original cost of the condemned land was $150,000, while the state compensated Jacob with $160,000, resulting in a gain of $10,000. However, Jacob reinvested the entire amount received, $160,000, into purchasing new land shortly after the condemnation. When it comes to taxable income, since the entire amount received from the condemnation was reinvested in similar property, Jacob would not have any taxable income from this transaction, assuming he meets the requirements of the IRS Section 1033 involuntary conversion.

Jacob's taxable income is $0 because he reinvested the entire compensation received from the condemnation into buying new land, potentially qualifying for nonrecognition of gain under IRS Section 1033.Therefore, the correct answer to what Jacob's taxable income would be is option 4: $0.