Question

Kitty’s factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2020. Insurance proceeds of $500,000 are received on June 1, 2020. She has a new factory building constructed for $490,000, which she occupies on October 1, 2020. Assuming Kitty’s objective is to minimize her current-year tax liability, calculate her recognized gain or loss and the basis of the new factory building.

Answer 1

Particulars	$
Insurance proceeds	$        500,000
Less Adjusted basis	$      (475,000)
Realized gain	$          25,000
Proceeds invested in new building	$        490,000
Un-reinvested amount	$          10,000
Gain recognized	$          10,000
Gain unrecognized	$          15,000
Adjusted basis of new property (proceeds invested - gain unrecognized)	$        475,000

Gain recognized - $10,000

Adjusted basis in new property - $475,000

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