Question

Heather owns a two-story building. The building is used 40% for business use and 60% for personal use. During 2020, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $100,000 on the business portion. At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed.

If an amount is zero, enter "0".

a. Determine the business and personal gain or loss in regard to the building and its contents.

Total Business Portion Personal Portion Cost of building $800,000 $ $ Less: Depreciation (100,000) Adjusted basis $700,000 $ $ Decline in FMV $700,000 $ $

Business Portion Personal Portion Loss on building (lesser of basis or decline in FMV) $ $ Less: Insurance reimbursement $ $ Loss on business contents $ Less: Insurance recovery $ Loss on personal contents $ Less: Insurance recovery $

b. Heather's AGI is $100,000 before considering the effects of the fire. Determine her itemized deduction and AGI after considering the effects of the fire.

Adjusted Gross Income AGI before the effects of the fire $100,000 Business gain - building $ Business loss - contents () Net business casualty loss () Personal casualty gain Personal casualty loss to extent of gain () Net personal casualty gain AGI $

Itemized Deduction Balance of personal casualty loss $

Answer 1

Solution

a. Determine the business and personal gain or loss in regard to the building and its contents.

Total		Business Portion	Personal Portion
Cost of building	$800,000	320,000	480,000
Less: Depreciation	(100,000)	100,000	0
Adjusted basis	$700,000	220,000	480,000
Decline in FMV	$700,000	280,000	420,000

Business Portion Personal Portion Loss on building (lesser of basis or decline in FMV) $ 220,000 $ 420,000 Less: Insurance reimbursement $ 240,000 $ 360,000 $ 20,000 $ (60,000) Loss on business contents $ 220,000 Less: Insurance recovery $ 175,000 Net Loss on Business Contents $ (45,000) Loss on personal contents $ 50,000 Less: Insurance recovery $ 65,000 Net Gain on personal contents $ 15,000

b. Heather's AGI is $100,000 before considering the effects of the fire. Determine her itemized deduction and AGI after considering the effects of the fire.

Adjusted Gross Income AGI before the effects of the fire $100,000 Business gain - building $ 20,000 Business loss - contents $ 45,000 Net business casualty loss $( 25,000) Personal casualty gain $ 15,000 Personal casualty loss to extent of gain $ 15,000 Net personal casualty gain $ 0 AGI $ 75,000

Itemized Deduction Balance of personal casualty loss $ 0

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