Sam's office building with an adjusted basis of $625,000 and a fair market value of $885,000 is condemned on December 30,2010.Sam is a calendar year taxpayer.He receives a condemnation award of $850,000 on March 1,2011.He builds a new office building at a cost of $830,000 which is completed and paid for on December 31,2013.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;$605,000.
B)$20,000;$830,000.
C)$20,000;$625,000.
D)$225,000;$830,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Sam's recognized gain on receipt of the condemnation award is calculated as follows:

Condemnation award: $850,000
Adjusted basis: $625,000

Realized gain: $225,000 ($850,000 - $625,000)

However, Sam can defer recognition of this gain under the involuntary conversion rules if he reinvests the proceeds in a new property within a specific time frame. In this case, he builds a new office building at a cost of $830,000.

The basis of the new office building is calculated as follows:

Cost of new building: $830,000
Less: Deferred gain: $225,000
Adjusted basis of new building: $605,000

Therefore, Sam has no recognized gain on receipt of the condemnation award and a basis for the new office building of $605,000. Choice C is the correct answer.

Sam's Office Building with an Adjusted Basis of $625,000 and a Fair