An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2019.On January 11, 2020, the insurance company paid the owner $450,000.The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss.The owner reinvested
$410,000 in a new office building on February 12, 2020, that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?
A)$0 and $320,000.
B)$0 and $410,000.
C)$40,000 and $320,000.
D)$130,000 and 410,000.

Question

Quizplus · Accepted Answer

The recognized gain is $40,000, calculated as the insurance proceeds ($450,000) minus the reinvestment in the new building ($410,000). The basis of the new building is $320,000, which is the adjusted basis of the destroyed building, because under § 1033, the basis of the new property is the basis of the old property adjusted by the gain recognized or loss realized.

An Office Building with an Adjusted Basis of $320,000 Was