A factory is destroyed by fire. Adjusted basis was $400,000. Insurance proceeds were $600,000. The taxpayer purchases a replacement factory for $550,000 within the replacement period. What is the recognized gain?

Answer options:

$50,000

$200,000

$150,000

How to approach this question

Involuntary Conversion: Gain recognized = Lesser of Realized Gain ($200k) or Unreinvested Proceeds ($50k).

Full Answer

B.$50,000✓ Correct

IRC §1033. <br/>Realized Gain = $600,000 - $400,000 = $200,000. <br/>Proceeds not reinvested = $600,000 - $550,000 = $50,000. <br/>Recognized Gain = $50,000.

Common mistakes

Recognizing the full realized gain.

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