ExpertMedium1 markMultiple Choice
CPA · Question 51 · Area IV: Property Transactions
A taxpayer owns a rental house. In Year 1, the house is destroyed by fire. Adjusted basis was $100,000. Insurance proceeds were $150,000. The taxpayer purchases a replacement rental house for $140,000 in Year 2. What is the recognized gain?
A taxpayer owns a rental house. In Year 1, the house is destroyed by fire. Adjusted basis was $100,000. Insurance proceeds were $150,000. The taxpayer purchases a replacement rental house for $140,000 in Year 2. What is the recognized gain?
Answer options:
A.
$0
B.
$10,000
C.
$50,000
D.
$40,000
How to approach this question
Involuntary Conversion (§1033): Gain recognized to extent proceeds are NOT reinvested. Proceeds $150k. Reinvested $140k. Unspent $10k -> Recognized Gain.
Full Answer
B.$10,000✓ Correct
IRC §1033. Gain is recognized to the extent the amount realized ($150,000) exceeds the cost of replacement property ($140,000). Excess = $10,000.
Common mistakes
Recognizing full gain; calculating basis incorrectly.
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