Rachel’s office building, which has an adjusted basis of $225,000, is destroyed
ID: 2480748 • Letter: R
Question
Rachel’s office building, which has an adjusted basis of $225,000, is destroyed by fire on March 5, 2015. Insurance proceeds of $375,000 are received on July 1, 2015. She has a new office building constructed for $350,000, which she occupies on December 1, 2015. Assuming Rachel’s objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new office building.
Show your work and explain why you think Congress created the rules to create the result you reached.
Explanation / Answer
Answer:
Amount realized...................................$375000
Adjusted basis of building....................($225000)
Realized gain......................................$150000
Amount realized..................................$375000
Less: Reinvestment............................($350000)
Deficiency.........................................$25000
Since Rachel's objective is to minimize tax liability, she would elect section 1033 postponement treatment.
Thus, her recognized gain would be $25000.
Rachel's postponed gain = 150000 - 25000 = 125000
The basis of the new office building would be $225000 ($350000 cost - $125000 postponed gain)
The congress created the rules because taxpayer was the actual user of the property and since the property is destroyed without the consent of the taxpayer, he/she should be allowed some recognition with the procceds from condemnation which would minimize his/her tax liability.
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