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 or loss on the involuntary conversion and its tax basis in the new van.

Question

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Since the insurance reimbursement of $90,000 exceeded the adjusted tax basis of the three destroyed vans of $48,900, there is a realized gain of $41,100 ($90,000 - $48,900). To determine the recognized gain, the gain must be reinvested in property similar or related in service or use to the property destroyed. Since Totle purchased a new delivery van for $70,000 on September 8, which is within two years of the end of the tax year in which the involuntary conversion occurred, they meet the reinvestment requirement. The recognized gain is $20,000 ($70,000 - $48,900). Therefore, Totle's tax basis in the new van is $48,900 (adjusted basis of destroyed vans) plus $70,000 (cost of new van) minus $20,000 (recognized gain) = $98,900.

In March, a Flood Completely Destroyed Three Delivery Vans Owned