Question

Ron's building, which was used in his business, was destroyed in a fire. Ron's adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of

A) $60,000
B) $0
C) $30,000
D) $90,000

Answer 1

Ron will recognize a gain of $90,000 as he reinvested $240,000 of the $300,000 insurance proceeds in another building, leaving $60,000 of proceeds not reinvested, which is considered as the recognized gain.

Step-by-step explanation:

Ron will recognize a gain of $90,000. Although he received $300,000 from the insurance, which is more than the adjusted basis of the property ($210,000), the recognized gain is deferred because he reinvested $240,000 in a replacement property.

The recognized gain is calculated by subtracting the adjusted basis from the amount of reimbursement not reinvested in a similar property. In this case, the recognized gain is the unreinvested $60,000 ($300,000 insurance proceeds − $240,000 reinvested).