An office building with an adjusted basis of $320,000 was destroyed by fire on D
ID: 2459767 • Letter: A
Question
An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2013. On January 11, 2014, 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 percent of the loss. The owner reinvested $410,000 in a new office building on July 12, 2015, that was smaller than the original office building. The owner is a calendar year taxpayer.
i) What is the taxpayer’s recognized gain or loss?
ii) What is the taxpayer’s basis for the new office building?
iii) What is the latest date that the owner can reinvest the proceeds and qualify for deferral treatment?
Explanation / Answer
Calculation of the recognised gain
The recognised gain = Amount received from the insurance company- Amount Reinvested
Recognised Gain = 450000-410000 = $ 40000
i) The Taxpayers recognised gain would be $ 40000
ii) Taxpayers basis for new building
It will be the amount of building destroyed by the fire.
The amount will be $ 320000