A flood destroys Owen's building that cost $100,000 in 2009,which has an adjusted basis of $80,000.Owen's insurance company reimburses him $125,000 for his loss.Owen promptly reconstructs the building for $115,000.What is the minimum amount of gain that Owen must recognize and his basis in the new building?

Recognized New
Gain Basis
A)$-0- $80,000
B)$-0- $115,000
C)$10,000 $80,000
D)$10,000 $115,000
E)$10,000 $150,000

Question

A flood destroys Owen's building that cost $100,000 in 2009,which has an adjusted basis of $80,000.Owen's insurance company reimburses him $125,000 for his loss.Owen promptly reconstructs the building for $115,000.What is the minimum amount of gain that Owen must recognize and his basis in the new building?
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Recognized New
Gain Basis
A)$-0- $80,000
B)$-0- $115,000
C)$10,000 $80,000
D)$10,000 $115,000
E)$10,000 $150,000

Quizplus · Accepted Answer

Owen's adjusted basis in the old building is $80,000. The insurance reimbursement of $125,000 exceeds the adjusted basis, so there is a gain of $45,000 ($125,000 - $80,000). Since Owen promptly reconstructs the building for $115,000, his basis in the new building is $115,000. However, he only needs to recognize a gain of $10,000 ($115,000 - $80,000 - $45,000) since the insurance reimbursement covers the remaining $35,000 of the gain. Therefore, the minimum amount of gain that Owen must recognize is $10,000 and his basis in the new building is $80,000 + $115,000 - $45,000 = $150,000. Option C is the correct choice.

A Flood Destroys Owen's Building That Cost $100,000 in 2009,which