Question 1

A taxpayer owns a rental house. In Year 1, the house is destroyed by fire. Adjusted basis was $100,000. Insurance proceeds were $150,000. The taxpayer purchases a replacement rental house for $140,000 in Year 2. What is the recognized gain?

Accepted Answer

Involuntary Conversion (§1033): Gain recognized to extent proceeds are NOT reinvested. Proceeds $150k. Reinvested $140k. Unspent $10k -> Recognized Gain.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Recognizing full gain; calculating basis incorrectly.

A taxpayer owns a rental house. In Year 1, the house is destroyed by fire. Adjusted basis was $100,000. Insurance proceeds were $150,000. The taxpayer purchases a replacement rental house for $140,000 in Year 2. What is the recognized gain?

How to approach this question

Full Answer

Common mistakes

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