Question

1. A taxpayer’s delivery van with an adjusted basis of $7,000 was stolen. Luckily, the taxpayer had comprehensive insurance on the van so the taxpayer received $10,000 to cover the loss (i.e., it was valued at $10,000 at the time of theft). The taxpayer is considering buying a new van for $15,000. What gain does the taxpayer recognize and what would the replacement van’s basis be?

   Gain:

   Basis in replacement van:

2. A taxpayer’s delivery van with an adjusted basis of $7,000 was stolen. Luckily, the taxpayer had comprehensive insurance on the van so the taxpayer received $10,000 to cover the loss (i.e., it was valued at $10,000 at the time of theft). The taxpayer is considering buying a used van for $9,000. What gain does the taxpayer recognize and what would the replacement van’s basis be?

Gain:

Basis in replacement van:

Answer 1

The property mentioned here is of a delivery van which has been stolen. It is being assumed that the vehicle was used for business purposes and not for personal purpose.

Usually, Theft loss is computed as reducing the insurance proceeds from the lower of the two:

a. Adjusted basis

b. Decrease in the Fair market value as a result of the casualty for which Fair market value before and after the casualty has to be compared.

But, if the insurance proceeds received is more than the adjusted basis, then there is a gain. In this case the decrease in FMV shall not be considered.  In this case, Gain = Insurance proceeds - Adjusted basis.

Adjusted basis = $7000

Insurance Proceeds = $10,000

Here insurance money received is more than adjusted basis.

Hence Gain = Insurance money - adjusted basis

= $10,000 - $7000

= $3000.

Now either this gain can be immediately reported or can be postponed, if a similar property is bought within specified period. This postponement is allowed if cost of new vehicle is atleast equal to the insurance proceeds received.

Since here the taxpayer is buying new van of $15000 which is more than the insurance money received of $10,000 hence no gain needs to be reported. The gain of $3000 can be deferred by buying a new asset.

Gains reported = zero.

The replacement value of new van = cost of new asset - deferred gains.

= $15000 - $3000

=$12000.

2. Here again there is gains of $3000.

But now the value of new van is $9000 which is less than insurance money received of $10000. Hence the money not spent have to be reported.

So taxable gains = $10000 - $9000 = $1000.

Total gains = $3000 out of which 1000$ gains is reported immediately hence deferred gains is $2000.

Basis of replacement van = Cost of the asset - deferred gains = $9000 - $2000 = $7000