Question

1. In the current year, John’s accounting office was partially destroyed by fire. His adjusted basis in the building was $300,000 and the decline in the fair value was $200,000. Insurance proceeds amounted to $160,000. What is John’ basis in the building?

Answer 1

In case of casualties the adjusted basis asset should be calculated by decreasing the amount received as Insurance reimbursement and should be increase with the amount of any expenses made for repairs for making the asset reusable.

So in our case as the partial property is destroyed in fire the adjusted Portion of the property should be decreased by the insurance proceeds received

Adjusted basis of the building = 300,000-160,000 = 140,000

This adjusted basis Is when the person considers the property for re use by making repairs. But, if the person decides to sell the property for coping with the loss of destruction then the adjusted basis for computing capital gain taxes would reduce by insurance claim and then decreased by deductible loss which is basically the reduction in fair market value. This decrease of deductible losses should be limited to the adjusted basis of the asset after reducing the insurance claim.

So, if John decides to sell the building then the adjusted basis would be as follows:

Adjusted basis of the building before the deductible loss = (300,000-160,000) = 140,000

Adjusted basis of the building=140,000-140,000=0