A barn held more than one year and used in a business is destroyed in a tornado. The barn originally cost $356,000 and was fully depreciated using straight-line depreciation. The barn was insured for its $543,000 replacement cost minus a deductible of $1,000. Which of the statements below is correct concerning these facts?
A) The barn was a long-term personal use asset.
B) There is a casualty loss from disposition of the barn.
C) The recognized gain from disposition of the barn is $186,000.
D) The recognized gain from disposition of the barn is subject to special netting rules.
E) c. and d.

Question

Quizplus · Accepted Answer

Since the barn was fully depreciated, there is no tax basis left in the asset, which means the insurance payment will result in a recognized gain. However, since the barn was used in a business, the recognized gain from the disposition is subject to special netting rules. Specifically, it must be included in ordinary income and not capital gain, and it can be offset by any casualty loss realized in the same tax year. Choice A is incorrect because the barn was used in a business, not for personal use. Choice B is incorrect because there is no disposition of the barn (it was destroyed). Choice C is incorrect because the recognized gain is not $186,000, but rather the difference between the insurance payment and the tax basis of the destroyed asset. Choice E is incorrect because choice C is incorrect.

A Barn Held More Than One Year and Used in a Business