Question

1. ABC Corporation owned a business warehouse that was destroyed by fire on October 1, 2020. On December 1, 2020 the corporation received an insurance payment of $900,000 for the loss. The corporation’s basis in the warehouse just prior to the loss was $500,000. The corporation would like to use the involuntary conversion rules to defer as much gain as possible. Assume the corporation built a new warehouse on the old site within the required timeframe and incurred construction costs of $950,000.  

How much gain would be taxable?

What would be the corporation’s basis in the new building?

Answer 1

1) The basis of the building was $500000 at the time of fire broke out and as an insurance claim it received $900000.
The amount received as an insurance claim is in excess of basis so it would attract capital gains tax.

Taxable Income =
900000 - 50000 = 400000

However, it has built the new building on the same site with the cost of $950000 within required time period.

This will be subjected to the rollover effect an as the cost incurred is higher than the insurance claim received so there will be no capital gains tax.

2) The amount incurred to build the new building is higher than the insurance claim received so this amount will be added to the original basis.

500000 + (950000 - 900000)
= 500000 + 50000
= 550000

The new basis will be $550000