ExpertMedium1 markMultiple Choice
CPA · Question 59 · Area IV: Property Transactions
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?
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:
A.
$0
B.
$50,000
C.
$200,000
D.
$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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