An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2017. On January 11, 2018, 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, 2018, 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.
E)None of the above.

Question

Quizplus · Accepted Answer

The recognized gain is the insurance proceeds ($450,000) minus the reinvestment ($410,000), which is $40,000. The basis of the new building is the cost of the new building ($410,000) minus the unrecognized gain ($90,000), which results in a basis of $320,000.

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