Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:$400,000 for the building$100,000 for lost profits during rebuildingPrime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime? a. $0b. $50,000c. $100,000d. $150,000

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7 November, 01:55

Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:$400,000 for the building$100,000 for lost profits during rebuildingPrime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime? a. $0b. $50,000c. $100,000d. $150,000

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Dominik · Answer 1

D) $150,000

Explanation:

Insurance proceeds that are not reinvested in replacing damaged property are taxed. Apparently Prime corporation didn't reinvest into replacing the property, so this transaction should be taxed as a property sale. Prime received $400,000 for the building with a $350,000 basis which results in a net gain = $50,000.

The other $100,000 were given as replacement income and therefore should be taxed as such.

So the total taxable amount = $50,000 + $100,000 = $150,000