Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30,2013.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1,2014.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31,2016.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?
A)$0; $720,000.
B)$30,000; $750,000.
C)$30,000; $845,000.
D)$150,000; $750,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Sam's recognized gain on receipt of the condemnation award is calculated as follows:
Condemnation award received: $875,000 
Adjusted basis of property: $750,000 
Recognized gain: $125,000 
However, because Sam used the condemnation proceeds to construct a new office building, he can defer recognition of this gain under the involuntary conversion rules of Section 1033. 
The basis for the new office building is calculated as follows:
Cost of new building: $845,000 
Minus deferred gain: $125,000 
New basis: $720,000

Therefore, the correct choice is B.

Sam's Office Building with an Adjusted Basis of $750,000 and a Fair