Question

For each of the following involuntary conversions, indicate whether the property acquired qualifies as replacement property, the recognized gain, and the basis for the property acquired.
a. A warehouse is destroyed by a tornado. The space in the warehouse was rented to various tenants. The adjusted basis was $470,000. The owner of the warehouse uses all of the insurance proceeds of $700,000 to build a shopping mall in a neighboring community where no property has been damaged by tornadoes. The shopping mall is rented to various tenants.
b. A warehouse is destroyed by fire. The adjusted basis is $300,000. Because of economic conditions in the area, the owner decides not to rebuild the warehouse.
Instead, it uses all of the insurance proceeds of $400,000 to build a warehouse in another state.
c. Ridge's personal residence is condemned as part of a local government project to widen the highway from two lanes to four lanes. The adjusted basis is $170,000. Ridge uses all of the condemnation proceeds of $200,000 to purchase another personal residence.
d. Swallow Fashions, Inc., owns a building that is destroyed by a hurricane. The adjusted basis is $250,000. Because of an economic downturn in the area caused by the closing of a military base, Swallow decides to rent space for its retail outlet rather than replace the building. It uses all of the insurance proceeds of $300,000 to buy a four unit apartment building in another city. A realtor in that city will handle the rental of the apartments.
e. Susan and Rick's personal residence is destroyed by a tornado. They had owned it for 15 months. The adjusted basis was $170,000. Because they would like to travel, they decide not to acquire a replacement residence. Instead, they invest all of the insurance proceeds of $200,000 in a duplex, which they rent to tenants.
f. Ellen and Harry's personal residence (adjusted basis of $245,000) is destroyed in a flood. They had owned it for 18 months. Of the insurance proceeds of $350,000, they reinvest $342,000 in a replacement residence four months later.


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  • CreatedMay 25, 2015
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