An office building with an adjusted basis of $320,000 was destroyed by fire on D
ID: 2450828 • Letter: A
Question
An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2015. On January 11, 2016, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90% of the loss. The owner reinvested $410,000 in a new office building on February 12, 2016, that was smaller than the original office building. What is the recognized gain or loss and the basis of the new building if Section 1033 is elected?
a. $0 and $320,000
b. $0 and $410,000
c. $40,000 and $320,000
d. $130,000 and $410,000
Explanation / Answer
Total gain = Insurance Claim - Adjusted Basis of destroyed Building
Total gain = 450000-320000
Total gain = 130000
if Section 1033 is elected
Recognized Gain = Insurance Claim – the Greater of Replacement Cost or the Adjusted Basis of Building
Recognized gain or loss = 450000-410000
Recognized gain or loss = $ 40000
Deferred Gain= Total gain - Recognized gain or loss
Deferred Gain= 130000-40000
Deferred Gain= 90000
Basis of the new building if Section 1033 is elected
Basis of the new building = Investment - Deferred Gain
Basis of the new building = 410000-90000
Basis of the new building = $ 320000
Answer
c. $40,000 and $320,000