Question

2.         Milt’s building, which houses his retail sporting goods store, is destroyed by a flood. Sandra’s warehouse, which she is leasing to Milt to store the inventory of his business, also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain and they both intend to purchase replacement property within the required time period.

a.             What type of replacement property must Milt find and why?

b.            What type of replacement property must Sandra find and why?

Answer 1

If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Your gain is figured as follows.

Loss on Property- Insurance Proceed

Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Sandra Will have less flexibility