An office building owned by Abby and used in her business was destroyed in a fir
ID: 2485305 • Letter: A
Question
An office building owned by Abby and used in her business was destroyed in a fire. Abby's adjusted basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another business building.
a. Assume Abby made the proper election with regard to the involuntary conversion. What is the amount of gain to be recognized by Abby?
b. What is Abby's basis in the new building?
Explanation / Answer
Answer a. Amount of gain to be recognized = Insurance proceeeds - Abby's Adjusted basis of old building
= 160000 -145000 = $ 15000
Answer b. Abby's basis in the new buiding would be investment amount reduced by deffered gain from insurance proceeds.
= 150000-15000 = $135000
Please note Abby would be able to defer the gain of 15000 as the new building was purchased for similar business purposes in th same year of destruction