Question

5. Bob owns a building that was taken away from him by New York State. His basis in the building was $150,000 and he received $750,000 from the State. He bought a new building, later that year for $1,000,000. How much gain, if any, does Bob have to recognize for tax purposes? 6. Same facts as 5, except Bob sold the building to Joe. What are the tax results? If there is a difference, why did Congress allow for different tax treatment?

Answer 1

Computation of gain received:

Total amount	750000
- basis of building	(150000)
Gain	600000

Purchase value of new building	1000000
- gain on sale of building to estate	(600000)
Net gain realised	400000

The Newyork state provides exemption from taxes if the gain is to the limit of $ 3.125 million i.e. $ 3125000. Thus, as the gain amount is within limit hence, no tax should be paid on such gains.

Contrary, If the property is sold to a person there is no such exemption and the whole amount will be taxable. Thus, if property is sold to JOE total gain realised is taxable.

As the building is taken away by the state which may or may not have the will of the person, thus, to compensate them they provides tax exemptions.