Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2017. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2018. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2020. 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 - Adjusted basis = Recognized gain
$875,000 - $750,000 = $125,000
However, $30,000 of the recognized gain can be deferred because Sam plans to reinvest the condemnation award in a new office building. This means Sam will only recognize $95,000 of gain in the current year.
Sam's basis for the new office building is calculated as follows:
Cost of new building - Deferred gain = Basis
$845,000 - $30,000 = $815,000
Since Sam's objective is to minimize gain recognition, he should defer as much gain as possible by reinvesting the condemnation award in a new building. Therefore, the best choice is B) $30,000; $750,000.

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