A warehouse (Basis $200,000) is destroyed by fire. Insurance pays $300,000. The taxpayer purchases a replacement warehouse for $280,000 within the replacement period. What is the recognized gain?

Answer options:

$20,000

$100,000

$80,000

How to approach this question

Involuntary Conversion (IRC §1033). Gain is recognized to the extent insurance proceeds are NOT reinvested. Proceeds $300k - Reinvested $280k = $20k recognized.

Full Answer

B.$20,000✓ Correct

IRC §1033. Gain is recognized to the extent the amount realized ($300,000) exceeds the cost of replacement property ($280,000). $20,000 gain.

Common mistakes

Thinking reinvesting the *basis* amount is enough.

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