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Edith's warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2018. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2019. Calculate Edith's realized gain or loss, recognized gain or loss, and basis for the replacement property if she: a) Acquires a new warehouse for $550,000 in January 2019. b) Acquires a new warehouse for $500,000 in January 2019. c) Does not acquire replacement property.

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  1. 21 July, 09:15
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    Check the explanation

    Explanation:

    the step by step solution to the question is;

    a. the answer to question A

    The Realizable gain=insurance proceeds less adjusted basis = 525,000 - 450,000 = $ 75,000

    The Realizable gain will be zero (0) due to the transaction being an involuntary conversion, Mr. E is eligible to section 1033 benefit that the gain of 75,000 is postponed.

    The Basis of replacement property = cost of warehouse less postponed gain = 550,000 - 75,000 = $ 475,000

    b. the answer to question B

    The Realizable gain = insurance proceeds less adjusted basis = 525,000 - 450,000 = $ 75,000

    The Realizable gain = divacancy in reinvestment less insurance proceeds less reinvestment = 525,000 - 500,000 = $ 25,000

    The Basis of replacement property = cost of warehouse less postponed gain = 500,000 - 50,000 = $ 450,000

    c. the answer to question C

    The Realizable gain = insurance proceeds less adjusted basis = 525,000 - 450,000 = $ 75,000

    The Recognized gain = 75,000
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