Question

13. Alice owns an apartment complex with an adjusted basis of $305,000. A flood occurs on a property, and the insurance policy reimburses Alice $500,000 for the loss. The transaction may be taxable as follows (circle as many as apply – more than one is correct):

A. Gain of $195,000 on the sale of the asset.

B. No taxable gain if $900,000 is reinvested into other commercial property owned within two years after the insurance is received.

C. No taxable gain if $305,000 is reinvested into other commercial property owned within two years after the insurance is received.

D No taxable gain if $700,000 is reinvested into another apartment complex within two years after the insurance is received.

E No taxable gain if $305,000 is reinvested to repair the existing apartment complex

15. An installment sale:

A. Can defer the recognition of a loss on the sale of real estate.
B. Applies only when a payment is received after the close of the tax year in which the sale occurs.

C. Must be applied in all situations when a payment is received after year end.
D. Can only be used for new construction.

E. All of the above.

Answer 1

13. Treatment of reimbursement received against a loss of property due to damage, disaster or theft is covered under “Publication# 547” of IRS.

As per current IRS regulation, if you receive a reimbursement amount higher than your adjusted basis of property, you are making gain and you are required to report it as an “Income” while filing your tax. However, reporting of such a gain on a damaged property can be postponed, if you buy a replacement property for a cost which is equal to or greater than the reimbursement received.

Hence, Statements A, B, and D are correct.

15. Rules related to “Installment Sale” of a real estate is covered under Publication# 547 of IRS.

Under an installment sale, you are allowed to defer your gain/loss on sale of a property. Hence, Statement A is correct.

A sale of property can be classified as “Installment Sale” if you receive at least one payment after the tax-year close. Hence Statement B is correct.

If you decide not to use “Installment Method” for such a sale, you can’t classify your sale of the property as “Installment sale” even if you receive the payment after year close. Hence, Statement C is incorrect.

Statement D is completely incorrect as “Installment Sale” does not require a property to be newly constructed.