Gil's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss. One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000. His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

Question

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Gil's adjusted basis for the new building should be $275,000, the cost of the new building, because the postponed loss is not added to the basis. The postponed loss is deferred and not recognized immediately.

Gil's Office Building (Basis of $225,000 and Fair Market Value