Question

For each of the following involuntary conversions, indicate whether the property acquired qualifies as replacement property, the recognized gain, and the basis for the property acquired.

If an amount is zero, enter "0".

a. Frank owns a warehouse that is destroyed by a tornado. The space in the warehouse was rented to various tenants. The adjusted basis was $470,000. Frank uses all of the insurance proceeds of $700,000 to build a shopping mall in a neighboring community where no property has been damaged by tornadoes. The shopping mall is rented to various tenants.

1. Qualifies as Replacement Property Yes/No

2. Recognized Gain $ -----

3. Basis $-----

b. Ivan owns a warehouse that is destroyed by fire. The adjusted basis is $300,000. Because of economic conditions in the area, Ivan decides not to rebuild the warehouse. Instead, he uses all of the insurance proceeds of $400,000 to build a warehouse for use in his business in another state.

1. Qualifies as Replacement Property 2. Recognized Gain $ 3. Basis $

c. Ridge's personal residence is condemned as part of a local government project to widen the highway from two lanes to four lanes. The adjusted basis is $170,000. Ridge uses all of the condemnation proceeds of $200,000 to purchase another personal residence.

1. Qualifies as Replacement Property 2. Recognized Gain $ 3. Basis $

d. Swallow Fashions, Inc., owns a building that is destroyed by a hurricane. The adjusted basis is $250,000. Because of an economic downturn in the area, caused by the closing of a military base, Swallow decides to rent space for its retail outlet rather than replace the building. It uses all of the insurance proceeds of $300,000 to buy a four-unit apartment building in another city. A realtor in that city will handle the rental of the apartments.

1. Qualifies as Replacement Property 2. Recognized Gain $ 3. Basis $

e. Susan and Rick's personal residence is destroyed by a tornado. They had owned it for 15 months. The adjusted basis was $170,000. Because they would like to travel, they decide not to acquire a replacement residence. Instead, they invest all of the insurance proceeds of $200,000 in a duplex, which they rent to tenants.

1. Qualifies as Replacement Property 2. Recognized Gain $ 3. Basis $

f. Ellen and Harry's personal residence (adjusted basis of $245,000) is destroyed in a flood. They had owned it for 18 months. Of the insurance proceeds of $350,000, they reinvest $342,000 in a replacement residence four months later.

1. Qualifies as Replacement Property 2. Recognized Gain $ 3. Basis $

Answer 1

A.

Owner is Owner-investor so we will use taxpayer use test.

Replacing the warehouse to another location as a mall qualifies as a replacement property.

Amount Realised = $700000

Adjusted Basis = ($470000)

Realised Gain = $230000

Recognized gain $ 0

The basis for the replacement property is:

Cost $ 700,000

Postponed gain (230,000)

Basis $ 470,000

B.

Owner is owner-user so we will use functional use test.

Replacing the warehouse used in business with another warehouse in a different state qualifies as

replacement property.

Amount realized $ 400,000

Adjusted basis (300,000)

Realized gain $ 100,000

Recognized gain $ 0

The basis for the replacement property is:

Cost $ 400,000

Postponed gain (100,000)

Basis $ 300,000

C.

Since Ridge is an owner-user, we will use the functional use test.

Purchasing another residence to replace the condemned residence qualifies as replacement

property.

Amount realized $ 200,000

Adjusted basis (170,000)

Realized gain $ 30,000

Recognized gain $ 0

The basis for the new personal residence is:

Cost $200,000

Postponed gain (30,000)

Basis $170,000

D.

Since Swallow Fashion, Inc., was an owner-user, we use the functional use test.

Since its use of the four-unit apartment building is different from the use of the building in its retail

business, the apartment building does not qualify as replacement property.

Amount realized $300,000

Adjusted basis (250,000)

Realized gain $ 50,000

Recognized gain $ 50,000

The basis for the apartment building is its cost of $300,000.

E.

Since Susan and Rick are owner-users, we use the functional use test.

The rental duplex does not qualify as replacement property.

Amount realized $200,000

Adjusted basis (170,000)

Realized gain $ 30,000

Recognized gain $ 30,000

The basis for the duplex is its cost of $200,000.

F.

Since Ellen and Harry are owner-users, we use the functional use test.

The personal residence acquired qualifies as replacement property under this test.

Amount realized $ 350,000

Adjusted basis (245,000)

Realized gain $ 105,000

Recognized gain $ 8,000

Of the realized gain of $105,000, the amount not reinvested of $8,000 ($350,000 − $342,000) is

recognized. Ellen and Harry do not qualify for the 121 exclusion.

The basis for the replacement residence is:

Cost $342,000

Postponed gain (97,000)

Basis $245,000