Charlotte's apartment building that has an adjusted basis of $200,000 is destroyed by fire. Early the following year, Charlotte receives a $425,000 insurance check and reinvests $400,000 of the proceeds in an apartment building. What is the basis in the new building?
A)$- 0 -
B)$425,000
C)$400,000
D)$200,000
E)$175,000

Question

Quizplus · Accepted Answer

The basis in the new building is $200,000. This is because Charlotte reinvested the insurance proceeds in a similar property, and under the tax code, if you reinvest the proceeds from an involuntary conversion (like a fire) into similar property, you can defer recognizing the gain. Since she received $425,000 but reinvested $400,000, she is deferring the gain, and the basis of the new property becomes the adjusted basis of the old property, which is $200,000.

Charlotte's Apartment Building That Has an Adjusted Basis of $200,000