A barn with an adjusted basis of $125,000 was destroyed by a tornado on March 5,2016.On May 15,2016,the insurance company paid the owner $150,000.The owner reinvested $170,000 in another barn.What is the basis of the new barn if non-recognition of gain from an involuntary conversion is elected?

Question

Quizplus · Accepted Answer

When a property is destroyed by a natural disaster, it is considered an involuntary conversion. The owner can elect to defer the gain by reinvesting the insurance proceeds in a similar property. The basis of the new property is calculated as follows:
Adjusted basis of old property + Cost of improvements to new property - Insurance proceeds received
Adjusted basis of old property = $125,000
Cost of improvements to new property = $170,000
Insurance proceeds received = $150,000
Therefore, the basis of the new property is $145,000 ($125,000 + $170,000 - $150,000). So, the best choice is B.

A Barn with an Adjusted Basis of $125,000 Was Destroyed