A warehouse (Basis 0,000) was destroyed by fire. Insurance paid 0,000. The taxpayer purchased a replacement warehouse for 0,000 within the required period. What is the recognized gain and the basis of the new warehouse?

Answer options:

Recognized Gain: 0; Basis: 0,000

Recognized Gain: ,000; Basis: 0,000

Recognized Gain: 0,000; Basis: 0,000

Recognized Gain: ,000; Basis: 0,000

How to approach this question

Involuntary Conversion: Recognize gain to the extent you DO NOT reinvest the insurance money. New Basis = Cost of New - Deferred Gain.

Full Answer

B.Recognized Gain: ,000; Basis: 0,000✓ Correct

Under §1033, gain is recognized to the extent insurance proceeds are not reinvested. 0,000 proceeds - 0,000 reinvested = ,000 recognized gain. Basis of new property = Cost (0,000) - Deferred Gain (,000) = 0,000.

Common mistakes

Recognizing the entire gain because the exact same asset wasn't bought.

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