Question

Several years ago, Logan purchased extra grazing land for his ranch at a cost of $240, 000. In 2020, the land is condemned by the state for development as a highway maintenance depot. Under the condemnation award, Logan receives $600,000 for the land. Within the same year, he replaces the property with other grazing land. What is Logan’s tax situation if the replacement land cost:

a. $210,000

b. $360,000

c. $630,000

Why?

Answer 1

a. $210000 The full realized gain of $360,000 [$600,000 (condemnation proceeds) - $240,000 (cost of land)] must be recognized, as only $210,000 was reinvested. The condemnation proceeds of $600,000 exceed the amount reinvested by more than $360,000. b. $360000 As only $360,000 was reinvested in replacement property, $240,000 ($600,000 - $360,000) of the gain must be recognized. C. $600000 As the full $600,000 was reinvested, no realized gain need be recognized. If some of the gain is not reinvested, there exists the ability to pay the tax. Thus, gain is recognized to the extent the proceeds are not reinvested. Note: Please comment down for any further clarifiactions.