Sid's home was destroyed by fire.He had purchased the home 18 months ago for $950,000.He received $1,300,000 from his insurance company to replace the home.If he fails to rebuild the home or acquire a replacement home in the required time,how much gain must he recognize on this conversion?
A)$350,000
B)$162,500
C)$100,000
D)$0
E)None of the above

Question

Quizplus · Accepted Answer

To calculate the gain, we need to compare the insurance proceeds received to the adjusted cost basis of the home. The adjusted cost basis is the original purchase price of $950,000 minus any depreciation taken on the home. Since Sid owned the home for only 18 months, we can assume there was no depreciation taken. Therefore, the adjusted cost basis is $950,000. 
$1,300,000 insurance proceeds - $950,000 adjusted cost basis = $350,000 potential gain. 
However, if Sid uses the insurance proceeds to rebuild or acquire a replacement home within the required time period, he can defer recognizing this gain. Therefore, the answer is $162,500, which is 50% of the potential gain.

Sid's Home Was Destroyed by Fire