Question

Johnny owned a gas station with adjusted basis of $300000 . After it was destroyed in a fire , he received $560000 from the insurance company .Within the next year, he bought a new gas station for $500000 . what is johnny's recognized gain and what is the basis in the new building?

Answer 1

Johnny's Realized Gain = Consideration received from insurance company - Adjusted Basis

= $560,000 - $300,000 = $260,000

Johnny's Recognized Gain = Consideration received from insurance company - Purchase cost of New Building

= $560,000 - $500,000 = $60,000

Deferred Gain = Johnny's Realized Gain - Johnny's Recognized Gain

= $260,000 - $60,000 = $200,000

Johnny's basis in new building = Cost of New Building - Deferred gain

= $500,000 - $200,000 = $300,000

Therefore Johnny's recognized gain is $60,000 and basis in new building is $300,000.