Question

**For tax year 2018** The office building Donna owned and used for her desk-top publishing business was destroyed by a hurricane. Although the basis of the building was $80,000, Donna carried replacement cost insurance and received $160,000 from the insurance company after it was determined that the building was a complete loss. It cost her $152,000 to rebuild the store in the current year.

a. Calculate Donna’s recognized gain, assuming an election under the involuntary conversion provision is made.	$__________
b. Calculate Donna’s basis in the replacement building.	$__________

Answer 1

Capital Gain Tax Donna
Desk top publishing business completely destroyed
Building Value ($)		80,000
Donna carried replacement
cost insurance and received $		1,60,000
Rebuild cost in the current Year($)		1,52,000
As per capital Gain Tax rule
Realized gain ( Increase Taxpayer economic position
In this Situation , relasized gain would be
difference of Building Lost value - Insurance claim Received
cost insurance and received $		1,60,000
Building Value ($)		80,000
Realized Gain($)(a)		80,000
Recognised Gain ( also Taxable gain BUT always lower
than Realized gain
cost insurance and received $		1,60,000
Rebuild cost in the current Year($)		1,52,000
Recognised Gain ($)(b)		8,000
Gain Recognized ( Min of (a) & (b)		8,000
Realized gain ( a) $		80,000
Recognised Gain ( b) $		8,000
Deferred Gain carry forward($) -(a-b)		72,000
Replacement Value
Rebuild cost in the current Year($)(a)		1,52,000
Deferred Gain carry forward($) (b)		72,000
Replacement Value ($)		80,000