Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident.The adjusted basis prior to the accident was $11,000.The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000.Insurance proceeds of $3,200 are received.What is Sandra's adjusted basis for the automobile after the casualty?
A)$0
B)$7,000
C)$7,800
D)$10,200

Question

Quizplus · Accepted Answer

The adjusted basis after the casualty is calculated by taking the adjusted basis prior to the accident ($11,000) and subtracting the insurance proceeds ($3,200), which gives $7,800. However, to find the adjusted basis after the casualty, we also need to consider the decrease in fair market value due to the accident, which is $4,000 ($10,000 - $6,000). Since the insurance proceeds are less than the decrease in fair market value, the adjusted basis is reduced by the amount of insurance proceeds. Therefore, the adjusted basis after the casualty is $11,000 - $3,200 = $7,800. My explanation contains an error in the final step; the correct calculation for the adjusted basis after the casualty should indeed consider the decrease in fair market value and the insurance proceeds, but the correct approach is to subtract the insurance recovery from the adjusted basis before the accident, leading to the correct answer of $7,800. However, the explanation mistakenly concludes with a different final step. The correct calculation is: Adjusted basis before the accident ($11,000) - Insurance proceeds ($3,200) = $7,800. This error in explanation led to an incorrect indication of the final answer. The correct answer, based on the proper calculation, should reflect the adjusted basis after accounting for the insurance proceeds received.

Sandra's Automobile, Which Is Used Exclusively in Her Trade or Business