Question

An office building with an adjusted basis of $420,000 was destroyed by fire on December 30, 2019. On January 11, 2020, the insurance company paid the owner $540,000. The fair market value of the building was $600,000, but under the co-insurance clause, the insurance company is responsible for only 90% of the loss. The owner reinvested $500,000 in a new office building on March 3, 2020, that was smaller than the original office building. What is the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

A. $420,000

B. $500,000

C. $540,000

D. $600,000

Answer 1

The basis of the new office building, if § 1033 is elected, is $420,000.

Step-by-step explanation:

Under § 1033 of the Internal Revenue Code, nonrecognition of gain from an involuntary conversion allows the owner to defer recognizing the gain if they reinvest the insurance proceeds in a replacement property. In this case, the new office building is considered a replacement property.

The adjusted basis of the destroyed office building is $420,000, which is the owner's basis in the replacement property. So, the basis of the new building is $420,000.