Question

Baker Corporation owned a building located in Kansas. Baker used the building for its business operations. Last year a tornado hit the property and completely destroyed it. This year, Baker received an insurance settlement. Baker had originally purchased the building for $350,000 and had claimed a total of $100,000 of depreciation deductions against the property.

a. What is Baker’s realized and recognized gain or (loss) on this transaction and what is its basis in the new building in the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

b. Baker received $450,000 in insurance proceeds and spent $500,000 rebuilding the building during the current year.

c. Baker received $450,000 in insurance proceeds and spent $400,000 rebuilding the building during the current year.

d. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding the building during the next three years.

Answer 1

a)

It is a tax deferred exchange, that occurs when the taxpayers dispose an asset and acquire another asset that is similar to the asset disposed of. The sale of first asset does not generate any tax liability.

(b)

Determine the realized and recognized gain or (loss):

	Description	Amount	Explanation
1	Amount realized	450,000	Insurance proceeds
2	Adjusted Basis	250,000	Refer Working Notes
3	Gain realized	200,000	(1)-(2)
4	Insurance proceeds	450,000	(1)
5	Proceeds reinvested	500,000	Rebuilding
6	Amount not reinvested	0	(4)-(5)
7	Gain recognized	0	Lesser of (3) or (6)
8	Deferred gain	200,000	(3)-(7)
9	Value of replacement property	500,000	Rebuilding
	Basis of replacement property	300,000	(9)-(8)

c)

Determine the realized and recognized gain or (loss):

	Description	Amount	Explanation
1	Amount realized	450,000	Insurance proceeds
2	Adjusted Basis	250,000	Refer Working Notes
3	Gain realized	200,000	(1)-(2)
4	Insurance proceeds	450,000	(1)
5	Proceeds reinvested	400,000	Rebuilding
6	Amount not reinvested	50,000	(4)-(5)
7	Gain recognized	50,000	Lesser of (3) or (6)
8	Deferred gain	150,000	(3)-(7)
9	Value of replacement property	400,000	Rebuilding
	Basis of replacement property	250,000	(9)-(8)

d)

Determine the realized and recognized gain or (loss):

	Description	Amount	Explanation
1	Amount realized	450,000	Insurance proceeds
2	Adjusted Basis	250,000	Refer Working Notes
3	Gain realized	200,000	(1)-(2)
4	Insurance proceeds	450,000	(1)
5	Proceeds reinvested	0	Rebuilding
6	Amount not reinvested	450,000	(4)-(5)
7	Gain recognized	200,000	Lesser of (3) or (6)
8	Deferred gain	0	(3)-(7)
9	Value of replacement property	450,000	Rebuilding
	Basis of replacement property	450,000	(9)-(8)

Working Notes:

Calculation of adjusted basis:

Purchase price = 350,000

Depreciation = 100,000

Adjusted basis = Purchase price-Depreciation

= 350,000-100,000

= 250,000