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Question 10 of 15. Sam lost his hunting cabin in a flood on May 15 of...

Question 10 of 15. Sam lost his hunting cabin in a flood on May 15 of the current tax year. His adjusted basis in the property was $23,000, and the fair market value of the property was $30,000 when it was destroyed. His insurance company reimbursed him $25,000. On December 2 of the current tax year, he purchased another hunting cabin for $35,000. What is his recognized (taxable) gain? $0 $2,000 $5,000 $10,000

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Answer #1

Recognized (taxable) gain = $0

An involuntary conversion occurs when  property is destroyed, stolen, condemned, or disposed and you receive other property or money in payment, such as insurance. It allows  to postpone recognition of gains realized from insurance proceeds that exceed the value of the property he or she  lost in a fire or flood as long as one should  use the insurance proceeds to buy replacement property. The realized gain is added to the basis of the replacement property and is not recognized until you later dispose of the replacement property in a taxable sale.
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