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Tax Deferred Exchange

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Kelley has a warehouse, which it owned for five years and used in trade or business to store inventory, that was destroyed by a tornado on October 30, 2012. Kelley paid $1,200,000 for the warehouse and its adjusted basis was $1,000,000 on the day it was destroyed by the tornado. Assume that Kelley received insurance proceeds of $1,200,000 on December 1, 2012, Kelley is a calendar-year corporation, and that the destruction of the warehouse by the tornado was an involuntary conversion under IRC Section 1033. Please answer the following questions.

a. Considering what happened, what type of property would be considered qualifying replacement property for Kelley?

b. What is the latest date Kelley may reinvest in qualifying replacement property to defer recognition of gain as a result of the involuntary conversion?

c. Assume that in 2013, Kelley decided to rebuild the warehouse. Assume further that Kelley spent $1,100,000 to rebuild the warehouse and it was completed by June 30, 2013. What is the amount of its realized gain, what is the amount and character of its recognized gain (if any), and what is its basis in its new warehouse? Please explain your answer and show all your calculations.

d. How would your answer in c above change if Kelley's adjusted basis in the warehouse destroyed by the tornado was $1,400,000 rather than $1,000,000. Please explain your answer and show all your calculations.

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Solution Summary

The expert examines tax deferred exchange. The type of property which would be considered for qualifying replacement property for Kelley.

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Note that under Section 1033, there are general rules to follow whenever a property is the subject of involuntary conversion on whether the property was converted into a similar property or into money.

Question a
For Kelley, qualifying replacement property can be defined as any property which is similar or related in service or use to the warehouse that was destroyed by the tornado. Since the property destroyed is a ...

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