Question: For each of the following involuntary conversions indicate whether the

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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