A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh 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 Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh has a recognized gain of $50,000.
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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

Statement I is incorrect because the realized gain is calculated by subtracting the adjusted basis from the amount of money received from the insurance company, which gives us $550,000 - $500,000 = $50,000. Statement II is correct because the recognized gain is the portion of the realized gain that is subject to taxation, which in this case is $50,000. Since Josh used the cash to go to Hawaii and did not reinvest it in a similar business or use it to make capital improvements to the destroyed business, he cannot defer the tax on the recognized gain.

A Fire Destroyed Josh's Scuba Shop