An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2020. On January 11, 2021, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2021, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

Recognized gain or loss = $40,000

Basis of the new building = $320,000

Explanation:

Total gain = Insurance Claim - Adjusted Basis of destroyed Building

Total gain = $450,000-$320,000 = $130,000

if Section 1033 (nonrecognition of gain from an involuntary conversion) is elected

Recognized Gain = Insurance Claim – the Greater of Replacement Cost or the Adjusted Basis of Building

Recognized gain or loss = $450,000-$410,000

Recognized gain or loss = $40,000

Deferred Gain = Total gain - Recognized gain or loss

Deferred Gain= $130,000-$40,000

Deferred Gain = $90,000

Basis of the new building if Section 1033 (nonrecognition of gain from an involuntary conversion) is elected

Basis of the new building = Investment - Deferred Gain

Basis of the new building = $410,000 - $90,000

Basis of the new building = $320,000

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