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Problem 7-38 (LO. 3, 4)

Heather owns a two-story building. The building is used 40% for business use and 60% for personal use. During 2020, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $100,000 on the business portion. At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed.

a. Determine the business and personal gain or loss in regard to the building and its contents. Business Personal Total PortiLoss on business contents Less: Insurance recovery $ Loss on personal contents Less: Insurance recoveryb. Heathers AGI is $100,000 before considering the effects of the fire. Determine her itemized deduction and AGI after consi

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Answer #1

Total

Business portion

Personal Portion

Cost of the Building

$    800,000.00

$    320,000.00

$    480,000.00

Less: Depreciation

$ (100,000.00)

$ (100,000.00)

$                      -  

Adjusted basis

$    700,000.00

$    220,000.00

$    480,000.00

Decline in FMV

$    700,000.00

$    280,000.00

$    420,000.00

Loss on Building ( Lesser of basis or decline in FMV)

$    220,000.00

$    420,000.00

Less : Insurance reimbursement

$    600,000.00

$    240,000.00

$    360,000.00

Gain on business portion

$       20,000.00

Loss on Personal portion

$    (60,000.00)

Net gain on loss on Building

$    (40,000.00)

Adjusted basis

$    220,000.00

Insurance recovery

$    175,000.00

Loss on business content

$    (45,000.00)

Adjusted basis

$       50,000.00

insurance recovery

$       65,000.00

gain on personal content

$       15,000.00

Net gain or loss on personal content

$    (30,000.00)

Adjusted Gross Income

AGI before effects of accident

$    100,000.00

Net loss on building and contents

$    (70,000.00)

Personal casualty gain

$                      0

Personal casualty loss to extent of gain

$                      0

Net personal casualty gain

$                      0

AGI   

$       30,000.00

Balance of personal casualty loss

$ (70,000.00)

Less loss per event floor = 100 per event

$         100.00

Less 10% AGI floor = 30000*10%

$      3,000.00

Itemized deduction

$ (66,900.00)

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