Jason's business warehouse is destroyed by fire. As the insurance proceeds exceed the basis of the property, a gain results. If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept.

Question

Quizplus · Accepted Answer

The wherewithal to pay concept allows taxpayers to defer recognition of gain if they reinvest the proceeds from a casualty or condemnation into similar property. As long as the amount reinvested is equal to or greater than the amount received, no gain is recognized. This applies even if the insurance proceeds exceed the basis of the property. Therefore, if Jason reinvests the proceeds in a new warehouse shortly, he can defer recognition of gain.

Jason's Business Warehouse Is Destroyed by Fire