A barn with an adjusted basis of $125,000 was destroyed by a tornado on March 5, 2015. On May 15, 2015, 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 non-recognition of gain from an involuntary conversion is elected, the basis of the new asset is the adjusted basis of the old asset minus any insurance or other reimbursement received plus any additional amounts paid. In this case, the adjusted basis of the old barn was $125,000 and the insurance reimbursement was $150,000. Therefore, the recognized gain was $25,000 ($150,000 - $125,000). The owner reinvested $170,000 in a new barn, which is more than the recognized gain of $25,000. Therefore, the entire recognized gain is deferred and the basis of the new barn is $145,000 ($125,000 - $150,000 + $170,000). Therefore, choice C is correct.

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