Harry owns equipment ($50,000 basis and $38,000 FMV)and a building ($140,000 basis and $156,000 FMV),which are used in his business.Harry uses straight-line depreciation for both assets,which were acquired several years ago.Both the equipment and the building are destroyed in a fire,and Harry collects insurance proceeds equal to the assets' FMV.The tax result to Harry for this transaction is
A)the involuntary conversions are treated as ordinary gains and losses.
B)the involuntary conversions are treated as Sec.1231 gains and losses.
C)the loss on involuntary conversion is treated as a Sec.1231 loss while the gain is treated as an ordinary gain.
D)the loss on involuntary conversion is treated as an ordinary loss while the gain is treated as a Sec.1231 gain.

Question

Quizplus · Accepted Answer

B)If the gains from involuntary conversions resulting from fire (and other casualties)exceed the losses,which are the case here,all are classified as Sec.1231 gains and losses.$38,000 - $50,000 = $12,000 loss; $156,000 - $140,000 = $16,000 gain.

Harry Owns Equipment ($50,000 Basis and $38,000 FMV)and a Building