Casualty Gain (Loss)

[Edsel]

Situation:  Taxpayer's AGI in 2017 is $110,000.  Taxpayer purchased house in 1995 for $120,000.  House was totally destroyed in 2017 by fire.  Insurance reimbursed $170,000.  Fair market value immediately before the fire was $250,000.  Home will be replaced at a cost of $275,000.

Question:  Which of the below describes the situation

• Gain is $50,000, computed at $170K minus $120K.  The gain will be added to the basis of new home.
• Loss is $80,000, computed at $250K minus $170K.  The loss will be subtracted from the basis of new home.
• Loss is $80,000, computed at $250K minus $170K, but the loss becomes a tax preference item for AMT.
• None of the above.

I realize this may seem like an elementary question to some of you, but I'm really not ready to read the 150 pages of code, regs, or pubs that apply.

Thanks in advance - Edsel

[jklcpa]

You have a $50K gain.  Insurance proceeds of $170K minus adjusted basis of $120K.

If this is the personal residence, the gain can potentially be excluded using those rules if the taxpayers meet those requirements, and then there's no need to discuss gain deferral.

If for some reason they can't exclude the gain under the personal residence rules, the gain may qualify for deferral under the involuntary conversion rules if the replacement is within the time allowed because the cost of the replacement property will exceed the insurance proceeds.   Deferred gains reduce basis, because ultimately when that home is sold, the lower basis will result in that final gain being higher by the amount that is being deferred now. 

[Terry D EA]

I agree with Judy totally.

[Richcpaman]

2 hours ago, Terry D said:

I agree with Judy totally.

I say this a lot as well^^^^

Rich

 

[Edsel]

Thanks to all.  Not surprised, as this is what I learned long ago in my foggy memory.

Makes me wonder why the 4684 asks for "Fair Market Value immediately before the Casualty".... any idears?

 

[jklcpa]

9 minutes ago, Edsel said:

Thanks to all.  Not surprised, as this is what I learned long ago in my foggy memory.

Makes me wonder why the 4684 asks for "Fair Market Value immediately before the Casualty".... any idears?

 

 

Yes, I have an idea. It's because the decrease in FMV is used to determine the loss if that decrease is less than adjusted basis.

 

 

[BulldogTom]

On 3/6/2018 at 3:00 AM, Terry D said:

I agree with Judy totally.

 

On 3/6/2018 at 5:34 AM, Richcpaman said:

I say this a lot as well^^^^

Rich

 

Suck ups!   You are just trying to get the gold star this week.

Tom
Modesto, CA

[jklcpa]

4 hours ago, BulldogTom said:

 

Suck ups!   You are just trying to get the gold star this week.

Tom
Modesto, CA

 

*taps foot*  waiting for Tom to post in another "star topic".   Maybe best to wait for another week for a better opportunity.

On second thought, I may have to devise a special award for Tom for being instrumental in suggesting this presitgious award. Or was it Yardley? 

[BulldogTom]

I am not taking the bait and telling you that I know how obviously brilliant you are and how giving of your time you are for the betterment of all on this board and how wonderful it is to have you here and how much better all of us are because you exist (takes breath).   As true as that statement is, I would never lower myself to sucking up to get a gold star.   No sir....not me.   I would not try to fool that brilliant mind of yours in any way or try to gain any type of favors from you because you are way too smart and would see right through the attempt because you are so smart and brilliant and wonderful.

Besides, I don't have a great story this week, and I don't want to go up against a ninja paper cutter.

Tom
Modesto, CA

[BulldogTom]

@jklcpa   You are killing me with those tears....

Tom
Modesto, CA