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Joyce’s office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce’s recognized gain or loss?

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Answer:

The answer is: Joyce's recognized gain is $10,000

Explanation:

For taxation purposes, Joyce must use the book value of her building (adjusted basis of $350,000), even if its fair market value was higher. Joyce must recognize as gain the difference between the amount of money she received from the insurance company and the book value of her building: ($360,000 - $350,000 = $10,000 gain).

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