Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30,2016.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1,2017.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31,2019.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

To calculate Sam's recognized gain on receipt of the condemnation award, we need to compare the condemnation award to the adjusted basis of the property.

Adjusted basis = $750,000

Condemnation award = $875,000

Recognized gain = Condemnation award - Adjusted basis = $875,000 - $750,000 = $125,000

However, Sam can potentially defer this gain by reinvesting the proceeds into a new qualifying property. To do this, Sam must follow the rules of IRS Code Section 1033.

Sam built a new office building at a cost of $845,000, which exceeds the condemnation award of $875,000. Therefore, Sam has fully reinvested the proceeds and can defer the recognized gain of $125,000.

The basis for the new office building is equal to the cost of the property, which is $845,000.

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