Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds equal to the assets' FMV.
a. What is the tax treatment of these two transactions?
b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).
a. Since they are destroyed in a casualty and since the gain of $12,000 ($148,000 FMV - $136,000) exceeds the loss of $8,000 ($15,000 FMV - $23,000), both items are treated as Sec. 1231 gains and losses.
b. The $20,000 loss on the equipment exceeds the $12,000 gain on the building. The net $8,000 loss will be treated as an ordinary loss.
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