An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2018. On January 11,2019, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2019, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?
A) $0 and $320,000.
B) $0 and $410,000.
C) $40,000 and $320,000.
D) $130,000 and 410,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The recognized gain is $40,000, which is the insurance proceeds ($450,000) minus the reinvested amount ($410,000). The basis of the new building is the adjusted basis of the old building ($320,000) because the gain is deferred under § 1033.

An Office Building with an Adjusted Basis of $320,000 Was