A warehouse was damaged in a storm. The warehouse was worth $225,000 before the

Question

A warehouse was damaged in a storm. The warehouse was worth $225,000 before the casualty and $65,000 after the casualty. The taxpayer's adjusted basis in the warehouse was $77,000. The insurance company reimbursed the taxpayer $150,000 for its loss. To avoid paying tax on the realized gain, how much must the taxpayer reinvest and in what type of property?

1) $77,000 in another warehouse

2) $150,000 in any other business or investment realty

3) $77,000 in any other business or investment realty

4) $160,00 in another warehouse

5) None of the above.

Explanation / Answer

5- None of the above.

To calculate the amount of disaster loss from business property, take the lesser of the adjusted basis of the property or the decrease in fair market value due to the disaster and subtract any insurance or other reimbursement that has been received or is expected.

adjusted value = 77000

loss in the value due to disaster = 160000 (225000- 65000)

we will take adjusted value which is less than loss in fair value

insurance claim received = 150000

capital gain = 150000 -77000 = 73000

If business property is destroyed and the insurance payments exceed the adjusted basis, there is a gain for tax purposes. The business may elect to postpone the gain by buying replacement property with a cost equal to or more than the insurance payments for business use within two years of the end of the tax year in which the gain was realized.

so there is no option of investing 150000 in the same business or assets so answer is 5 - none of the above

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