Williams owned an office building (but not the land) that was destroyed by a fir

Question

Williams owned an office building (but not the land) that was destroyed by a fire. The building was insured and Williams has a $156,000 gain because his insurance recovery exceeded his adjusted basis for the building. Williams may replace the building. Williams had taken $145,000 of depreciation on the building, has no § 1231 lookback loss, has no other § 1231 transactions for the year, and has no Schedule D transactions for the year. What is the final nature of Jamison’s gain for the year and what tax rate(s) apply to the gain if: a. He does reinvest the insurance proceeds? b. If he doesn’t reinvest the insurance proceeds?

Explanation / Answer

(a)Williams initially has a casualty gain of $156,000 from business use property. If he reinvests the insurance proceeds, he will be able topostpone this gain.

(b)If he does not reinvest, he will have a recognized gain. Since he has a net casualty gain, the gain is treated as § 1231 gain and that gain istreated as a long-term capital gain because he has no § 1231 look back loss. Williams has a net long-term capital gain of $156,000 becausehe has no other Schedule D transactions. The unrecaptured § 1250 portion of the gain is $145,000 (equal to the depreciation taken on thedestroyed property). That portion of the gain is subject to an alternative tax rate of 25%. The $11,000 ($156,000 – $145,000) remaining gain is subject to the 0%/15%/20% alternative tax rate.

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