If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion)and the amount reinvested in replacement property exceeds the amount realized,the basis of the replacement property is:
A)The cost of the replacement property.
B)The fair market value of the involuntarily converted property minus the postponed gain.
C)The cost of the replacement property minus the postponed gain.
D)The amount realized.
E)None of these.

Question

Quizplus · Accepted Answer

When a taxpayer qualifies for nonrecognition of gain under § 1033, the basis of the replacement property is equal to the cost of the replacement property minus the postponed gain. This is because the postponed gain is recognized when the replacement property is sold or otherwise disposed of, and the basis is used to determine the gain or loss on that disposition. The fair market value of the involuntarily converted property minus the postponed gain is used to determine any additional gain that may need to be recognized if the cost of the replacement property exceeds the amount realized. Therefore, option C is the correct answer.

If the Taxpayer Qualifies Under § 1033 (Nonrecognition of Gain