Question

Marcus purchased a diamond ring for $15,000 10 years ago. It was stolen in March of this year. The ring was purchased to celebrate achieving a significant promotion at work. The FMV at the time of the theft was $20,000. The ring was insured, and, after the deductible, Marcus received $19,000 from the insurance company in October of this year. Under Section 1033, how does Marcus account for the $4,000 realized gain on his income taxes?

A) Marcus must use the taxpayer-use test in determining whether the replacement property qualifies under Section Under 1033.

B) If Marcus purchases another ring for $19,000 or more, his realized gain is not recognized.

C) Marcus must purchase the qualified replacement property before the end of this year for his realized gain to not be recognized.

D) Marcus has three years from the end of this year to replace the property without having to recognize any realized gain.

Answer 1

Marcus must use the taxpayer-use test and purchase the qualified replacement property before the end of this year for his realized gain to not be recognized under Section 1033.

Step-by-step explanation:

Marcus must use the taxpayer-use test and purchase the qualified replacement property before the end of this year for his realized gain to not be recognized under Section 1033. The taxpayer-use test requires that the replacement property be similar or related in service or use to the property that was lost or destroyed.

In this case, Marcus must purchase another ring that is valued at $19,000 or more to match the FMV of the stolen ring. By doing so, his realized gain of $4,000 will not be recognized for income tax purposes.