A fire destroys David's business building that cost $200,000 in 2005 and had an adjusted basis of $160,000. David's insurance company reimburses him $250,000 for his loss. David promptly reconstructs the building for $230,000.
a.What is the amount and the character of David's minimum recognized gain (loss)?b.What is the basis of David's new building?
What will be an ideal response?
| a. | David must recognize an unrecaptured Section 1250 gain of $20,000 on the casualty. David realizes a gain of $90,000 ($250,000 - $160,000). David is allowed to defer the casualty gain. However, any insurance proceeds that are not reinvested in the replacement property are subject to tax. In this case, David has $20,000 ($250,000 - $230,000) of insurance proceeds remaining after the replacement. Buildings used in a trade or business are Section 1231 property. David does not have to recapture any depreciation on the gain because the property is Section 1250 property and straight-line depreciation would have been used on the property (39-year MACRS property). However, the portion of the gain that is attributable to the depreciation taken on the building is considered unrecaptured Section 1250 gain and is taxed at a maximum tax rate of 25%. |
| b. | David's basis in the new building is $160,000 ($230,000 - $70,000). Any gain realized on a casualty that is not recognized in the current period is deferred to the basis of the replacement property. |
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Income Statements
Retained Earnings Statements
Other Information:
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