Question

1. ABC Corporation owned a business warehouse that was destroyed by fire on October 1, 2020. On December 1, 2020 the corporation received an insurance payment of $900,000 for the loss. The corporation’s basis in the warehouse just prior to the loss was $500,000. The corporation would like to use the involuntary conversion rules to defer as much gain as possible. Assume the corporation built a new warehouse on the old site within the required timeframe and incurred construction costs of $950,000.  

1. How much gain would be taxable?

1. What would be the corporation’s basis in the new building?

Answer 1

In case of Involuntary conversion when property is destroyed by fire and the taxpayer receives insurance proceeds.

• If whole of the proceeds received is re-invested within specified time then any gain realized from the destroyed property will not be recognized and cost of new asset will be reduced to the extent of gain unrecognized.

Particualrs	$
Insurance proceeds	$          900,000
Less Adjusted basis	$        (500,000)
Gain realized	$          400,000
Proceeds reinvested within specified time	$          950,000
Gain Unrecognized	$          400,000
Gain taxable	$                     -
Cost of new property	$          950,000
Less gain Unrecognized	$        (400,000)
Basis in new property	$          550,000

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