Edith's warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2019. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2020. Calculate Edith's realized gain or loss, recognized gain or loss, and basis for the replacement property under each of the following conditions:

(a) She acquires a new warehouse for $550,000 in January 2016.

(b) She acquires a new warehouse for $500,000 in January 2016.

(c) She does not acquire replacement property.

A) Realized Gain = $75,000

Recognized Gain = $0

B) Realized Gain = $75,000

Recognized Gain = $25,000

C) Realized Gain = $75,000

Recognized Gain = $75,000

Explanation:

A) Insurance Proceeds = $ 525,000

Adjusted Basis = $ 450,000

Realized Gain = $ 75,000 ($525,000-$450,000)

Recognized Gain = $ 0

A taxpayer can postpone any realized gain to the extent that the taxpayer reinvests the compensation for conversion into replacement property.

In this case whole realized gain will not be recognized as total amount reinvested exceeds the amount realized.

B) Realized Gain = $75,000

Recognized Gain = $25,000 ($525,000-$500,000)

In this case, the reinvestment amount is less than proceeds realized, so the difference will be recognized as gain.

C) Realized Gain = $75,000

Recognized Gain = $75,000

In absence of reinvestment of proceeds, whole gain will be recognized as chargeable for tax.