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.

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