Question

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2013. On January 11, 2014, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on July 12, 2015, that was smaller than the original office building. The owner is a calendar year taxpayer.
i) What is the taxpayer’s recognized gain or loss?
ii) What is the taxpayer’s basis for the new office building?
iii) What is the latest date that the owner can reinvest the proceeds and qualify for deferral treatment?

Answer 1

Answer:

i.  $40,000

ii. $410,000

iii. 180 days after July 12, 2015

Explanation:

i. The taxpayer's recognized gain is $40,000 ($450,000 -$410,000). The cost of the new office - the amount received from the insurance company.

ii. The taxpayer's basis for the new office is the cost of purchasing the new office building which is $410,000.

iii. Taxpayers can qualify for deferral treatment if they reinvest proceeds into a QOF (Qualified Opportunity Funds) within 180 days of receiving the gain. Because the new office was purchased on July 12, this is the applicable date.