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6 January, 00:34

Oscar owns a building that is destroyed in a hurricane. His adjusted basis in the building before the hurricane is $130,000. His insurance company pays him $140,000 and he immediately invests in a new building at a cost of $142,000. What is the amount of recognized gain or loss on the destruction of Oscar's building?

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  1. 6 January, 00:43
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    That is $2,000 loss

    Explanation:

    After the hurricane Oscar received $140,000 for his loss, the adjusted basis for his property was $130,000 so he had a gain of 140,000 - 130,000=$10,000.

    According to Sec. 1033 (a) (2) since the new property that was built (the replacement) was similar we will recognise the amount received from the insurance company ($140,000) to the extent that it pays for the replacement property.

    That is

    Gain or loss = amount paid by insurance company - cost of replacement property

    Gain or loss = 140,000 - 142,000

    Gain or loss = - $2,000

    That is $2,000 loss
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