Cisco, a calendar year taxpayer who is age 63, owns a residence in which he has lived for 21 years. The residence is destroyed by fire on August 8, 2016. The adjusted basis is $190,000, and the fair market value is $320,000. Cisco receives insurance proceeds of $320,000 for the residence on September 1, 2016. He is trying to decide whether to purchase a comparable house. He anticipates that he will retire in two years and will move to a warmer climate, where he will rent in case he decides to live in different places.

a. Advise Cisco of the tax consequences of replacing versus not replacing the residence.

b. Which do you recommend to him?

c. How would your answer in (a) change if the fair market value and insurance proceeds received were $510,000?