Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2012.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1, 2013.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2015.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?
A)$0; $720,000.
B)$30,000; $750,000.
C)$30,000; $845,000.
D)$150,000; $750,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Sam's recognized gain on the condemnation of the building is the excess of the amount realized over the adjusted basis of the building. The amount realized is $875,000, while the adjusted basis of the building is $750,000. Therefore, the recognized gain is $125,000 ($875,000 - $750,000). However, Sam can defer this gain recognition by purchasing a replacement property (i.e. a new office building) within a specified period.

To minimize gain recognition, Sam should reinvest the entire condemnation award of $875,000 into the new office building. This will result in a basis for the new office building of $750,000 (the adjusted basis of the condemned building) plus the cost of the new office building ($845,000), for a total basis of $1,595,000. Therefore, the recognized gain on receipt of the condemnation award is $30,000 ($875,000 - $845,000), and the basis for the new office building is $750,000 + $845,000 = $1,595,000. The correct answer is B.

Sam's Office Building with an Adjusted Basis of $750,000 and a Fair