Question

Jaime’s home was completely destroyed by flooding in 2016. He purchased the home in 2010 for $175,000 including $50,000 allocated for the land. a. What is Jaime’s loss (assuming he had no insurance)? b. If Jaime’s adjusted gross income is $80,000, what is his deductible loss? c. Assume Jaime had insurance and received $160,000 in insurance proceeds to rebuild his home. What is his realized gain or loss? d. What is the recognized gain or loss if he elects to build a smaller home and only uses $120,000 of the insurance proceeds to build the replacement home?

Would C. and D. be a gain or loss?

Answer 1

part a:
Particulars	Amount ($)	Amount ($)
Price paid to purchase the home	175,000.00
Less: Amount allocated for the land	50,000.00
Loss to Jaime		125,000.00

Part b:

In case Jaime’s adjusted gross income is $80,000 then the deductible loss would be lower of the actual loss and the adjusted gross income. Since the gross adjusted income is $80,000 lower than the loss from flood hence, the amount of deductible loss is $80,000, i.e. the gross adjusted income.

Part c:

Particulars	Amount ($)	Amount ($)
Particulars	Amount ($)	Amount ($)
Amount received from insurance	160,000.00
Add: Amount allocated for land	50,000.00
	210,000.00
Less; Home purchased for	175,000.00
Gain (210000 - 175000)		35,000.00

Part d:

Particulars	Amount ($)	Amount ($)
Amount received from insurance	160,000.00
Add: Amount allocated for land	50,000.00
	210,000.00
Less: Cost of rebuilding small home	120,000.00
Gain (210000 - 120000)		90,000.00

Note:

In all cases it has been assumed that the allocation for Land of $50,000 is compulsory.