In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its property insurance company, and on September 8, it purchased one new delivery van for $70,000. Compute Totle's recognized gain on loss on the involuntary conversion and its tax basis in the new van.
A) No recognized gain or loss; $48,900 basis in the van
B) $20,000 recognized gain; $70,000 basis in the van
C) $20,000 recognized gain; $48,900 basis in the van
D) None of these choices are correct

Question

Quizplus · Accepted Answer

When property is involuntarily converted, the taxpayer must recognize a gain or loss equal to the difference between the reimbursement received and the adjusted tax basis of the property. In this case, Totle received $90,000 from its property insurance company and its adjusted tax basis in the vans was $48,900. Therefore, Totle has recognized gain of $41,100 ($90,000 - $48,900).

When the taxpayer reinvests the reimbursement in similar property within a certain period of time, the recognized gain can be deferred. In this case, Totle purchased one new delivery van for $70,000, which is similar property to the three vans that were destroyed. Therefore, Totle can defer the recognized gain of $41,100.

The tax basis of the new delivery van is equal to the cost of the van ($70,000), reduced by the deferred gain ($41,100). Therefore, the tax basis of the new delivery van is $28,900 ($70,000 - $41,100), which is the same as the adjusted tax basis of the three destroyed vans.

In March, a Flood Completely Destroyed Three Delivery Vans Owned