LO.3 For each of the following involuntary conversions, indicate whether the property acquired qualifies as replacement property, the recognized gain, and the basis for the property acquired:

a. Frank owns a warehouse that is destroyed by a tornado. The space in the warehouse was rented to various tenants. The adjusted basis was $470,000. Frank uses all of the insurance proceeds of $700,000 to build a shopping mall in a neighboring community where no property has been damaged by tornadoes. The shopping mall is rented to various tenants.

b. Ivan owns a warehouse that he uses in his business. The adjusted basis is $300,000.

The warehouse is destroyed by fire. Because of economic conditions in the area, Ivan decides not to rebuild the warehouse. Instead, he uses all of the insurance proceeds of $400,000 to build a warehouse to be used in his business in another state.

c. Ridge’s personal residence is condemned as part of a local government project to widen the highway from two lanes to four lanes. The adjusted basis is $170,000. Ridge uses all of the condemnation proceeds of $200,000 to purchase another personal residence.

d. Juanita owns a building that she uses in her retail business. The adjusted basis is

$250,000. The building is destroyed by a hurricane. Because of an economic downturn in the area caused by the closing of a military base, Juanita decides to rent space for her retail outlet rather than replace the building. She uses all of the insurance proceeds of $300,000 to buy a four-unit apartment building in another city. A real estate agent in that city will handle the rental of the apartments for her.

e. Susan and Rick’s personal residence is destroyed by a tornado. They had owned it for 15 months. The adjusted basis was $170,000. Because they would like to travel, they decide not to acquire a replacement residence. Instead, they invest all of the insurance proceeds of $200,000 in a duplex, which they rent to tenants.

f. Ellen and Harry’s personal residence (adjusted basis of $245,000) is destroyed in a flood. They had owned it for 18 months. Of the insurance proceeds of $350,000, they reinvest $342,000 in a replacement residence four months later.