ExpertMedium1 markMultiple Choice
CPA · Question 60 · Area IV: Property Transactions
A warehouse (Basis $200,000) is destroyed by fire. Insurance pays $300,000. The taxpayer purchases a replacement warehouse for $280,000 within the replacement period. What is the recognized gain?
A warehouse (Basis $200,000) is destroyed by fire. Insurance pays $300,000. The taxpayer purchases a replacement warehouse for $280,000 within the replacement period. What is the recognized gain?
Answer options:
A.
$0
B.
$20,000
C.
$100,000
D.
$80,000
How to approach this question
Involuntary Conversion (IRC §1033). Gain is recognized to the extent insurance proceeds are NOT reinvested. Proceeds $300k - Reinvested $280k = $20k recognized.
Full Answer
B.$20,000✓ Correct
B
IRC §1033. Gain is recognized to the extent the amount realized ($300,000) exceeds the cost of replacement property ($280,000). $20,000 gain.
Common mistakes
Thinking reinvesting the *basis* amount is enough.
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