Question

Jewel’s home was completely destroyed by a wildfire in 2018 in an area declared a national disaster. The building had an appraised value of $185,000 before the fire. Four years ago Jewel paid $160,000 for the house and the land, with $25,000 of the price allocated to the land.
a. What is Jewel’s loss on the fire, assuming no insurance?

b. What is her deductible loss if her adjusted gross income is $40,000?

c. What is Jewel’s realized gain or loss if she receives $190,000 from the insurance company to rebuild the home?

d. What is her recognized gain if she uses only $130,000 of the insurance proceeds to rebuild a smaller replacement residence on the same land?

Answer 1

a.) ($160,000 - $25,000) = $135,000 is the loss on the fire.

b.) her deductible loss will be {$135,000 - [$100+ ($40,000*10%)]} = $130,900

c.) gain or loss if she receives $190,000 from the insurance company is $190,000 - $135,000 = $55,000 is the realized gain.

d.) as per the section 121 the recognized gain will be zero as it is same as a sale and she doesnt have to recognize any gain, assumption that she meets the ownership criteria and occupancy requirment.

if she doesnt use section 121 then she will have to recognize a gain of $55,000.