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Teresa's manufacturing plant is destroyed by fire. The plant has an adjusted basis of $270,000, and Teresa receives insurance proceeds of $410,000 for the loss. Teresa reinvests $420,000 in a replacement plant within 2 years of receiving the insurance proceeds. a.) Calculate Teresa’s recognized gain if she elects to utilize the involuntary conversion provision.


b.) Calculate Teresa’s basis in the new plant.

Answer :

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Answer:

Please find the detailed answer as follows:

Explanation:

Step 1. Given information.

  • Adjusted basis of 270.000
  • Insurance 410.000
  • Reinvests 420.000

Step 2. Calculation.

a) A realized gain on the involuntary conversion of property occurs when the taxpayer receive the proceeds in excess of his or her adjusted basis.

involuntary conversion gain is not recognized if the proceeds or payments are reinvested in qualified replacement property within the required time period and the taxpayer makes the proper election.

Involuntary conversion gain = $ 410000- $ 270000 = $ 140000, which is not to be recongnized as the same is reinvested in the replacement of the asset.

b) Teresa's basis in the new plant :-

$ 270000-$410000+$420000= $280000.

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