Question

Baker Corporation owned a building located in Kansas. Baker used the building for its business operations. Last year a tornado hit the property and completely destroyed it. This year, Baker received an insurance settlement. Baker had originally purchased the building for $350,000 and had claimed a total of $100,000 of depreciation deductions against the property. What is Baker’s realized and recognized gain or (loss) on this transaction and what is its basis in the new building in the following alternative scenarios?a. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding the building during the current year.b. Baker received $450,000 in insurance proceeds and spent $500,000 rebuilding the building during the current year.c. Baker received $450,000 in insurance proceeds and spent $400,000 rebuilding the building during the current year.d. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding the building during the next three years.

Answer 1

a. Recognized Gain $0 and Basis in new building $250,000

b. Recognized Gain $0 and Basis in new building $300,000

c. Recognized Gain $50,000 and Basis in new building $250,000

d. Recognized Gain $200,000 and Basis in new building $450,000

Step-by-step explanation:

a. Baker has reinvested the insurance proceeds and therefore will not recognize any of its $200,000 realized gain. Moreover, Baker’s basis in the new building is $250,000. As shown below:

S. No. Particular Amount($) Clarification

1 Insurance Proceeds 450,000 Given in Question

2 Adjusted Value 250,000 350,000 - 100,000

3 Realized Gain 200,000 (1) – (2)

4 Proceeds Reinvested 450,000 Given in Question

5 Amount not Reinvested 0 (1) – (4)

6 Gain recognized 0 Lower of (3) or (5)

7 Deferred Gain 200,000 (3) – (6)

8 Value of Replacement Property 450,000 Given in Question

9 Basis of Replacement Property 250,000 (8) – (7)

b. Baker has reinvested the insurance proceeds and therefore will not recognize any of its $200,000 realized gain. Moreover, Baker’s basis in the new building is $300,000. As shown below:

S. No. Particular Amount($) Clarification

1 Insurance Proceeds 450,000 Given in Question

2 Adjusted Value 250,000 350,000 - 100,000

3 Realized Gain 200,000 (1) – (2)

4 Proceeds Reinvested 500,000 Given in Question

5 Amount not Reinvested 0 (1) – (4)

6 Gain recognized 0 Lower of (3) or (5)

7 Deferred Gain 200,000 (3) – (6)

8 Value of Replacement Property 500,000 450,000 + 50,000

9 Basis of Replacement Property 300,000 (8) – (7)

c. Baker has reinvested $400,000 of the insurance proceeds and therefore will recognize gain of $50,000 out of the $200,000 realized gain. Moreover, Baker’s basis in the new building is $250,000. As shown below:

S. No. Particular Amount($) Clarification

1 Insurance Proceeds 450,000 Given in Question

2 Adjusted Value 250,000 350,000 - 100,000

3 Realized Gain 200,000 (1) – (2)

4 Proceeds Reinvested 400,000 Given in Question

5 Amount not Reinvested 50,000 (1) – (4)

6 Gain recognized 50,000 Lower of (3) or (5)

7 Deferred Gain 150,000 (3) – (6)

8 Value of Replacement Property 400,000 450,000 - 50,000

9 Basis of Replacement Property 250,000 (8) – (7)

d. Baker has taken three years in order to replace the property destroyed and therefore, will recognize all of its $200,000 realized gain. Baker's basis in the new building is $450,000. As shown below:

S. No. Particular Amount($) Clarification

1 Insurance Proceeds 450,000 Given in Question

2 Adjusted Value 250,000 350,000 - 100,000

3 Realized Gain 200,000 (1) – (2)

4 Proceeds Reinvested 0 Given in Question

5 Amount not Reinvested 450000 (1) – (4)

6 Gain recognized 200,000 Lower of (3) or (5)

7 Deferred Gain 0 (3) – (6)

8 Value of Replacement Property 450,000 Given in Question

9 Basis of Replacement Property 450,000 (8) – (7)