Question

Gordon purchased grazing land for his ranch at a cost of $80K. In 2010, the land was condemned by the state for developments as a highway maintenance depot. Under the condemnation award, Gordon received $200K for the land. Within the same year, he replaced the property with other grazing land. What is Gordon's tax situation if the replacement land cost: I. $70,000? II. $120,000? III. $210,000. IV. Why?

Answer 1

I. Condemnation award received was for 200K, purchasing cost was 80K, Gain = 200K-80K = 120K, as his replacement coat for the land was only 70K, entire 120K will be taxed due to not being reinvested.

II. Condemnation award was 200K, replacement cost is 120K, gain realized will be for 200K-120K = 80K.

III. Full amount was reinvested, no gain to be realized, no taxable income.

IV. Gain from selling the property must be reinvested in some proportion or else there would be liability to pay.