A fire destroyed Jimmy's Teeshirt Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire. Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds.
I.Jimmy has a realized gain of $50,000.
II.Jimmy has a recognized gain of $50,000.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

A fire destroyed Jimmy's Teeshirt Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000 before the fire. Jimmy received $550,000 from the insurance company and opened a new Teeshirt Shop with the proceeds.
I.Jimmy has a realized gain of $50,000.
II.Jimmy has a recognized gain of $50,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Jimmy has a realized gain of $50,000 because the insurance proceeds of $550,000 exceed the adjusted basis of $500,000. However, if he reinvests the insurance proceeds in a similar property (a new Teeshirt Shop), he may not have to recognize this gain for tax purposes, depending on specific tax regulations.

A Fire Destroyed Jimmy's Teeshirt Shop