Carryover Basis

Course: Income Tax Planning
Lesson 15: Property Transactions

Student Question:

I have a question from this question below regarding the 1033 election for involuntary conversions. 

Sparky’s office building was destroyed by fire on January 2nd of last year. The building had an adjusted basis of $620,000. On January 15th of this year, the insurance company paid Sparky $700,000. He immediately built a new office building for $710,000. What is the basis in Sparky’s new building if he elected Section 1033 (non-recognition of gain from an involuntary conversion)?”

In such a situation, would the original basis not simply transfer over?

    Instructor Response:

    Hi Martin, that’s a great question.  You are directionally correct.  A carryover basis does apply since Sparky used all of the insurance proceeds for the new building.  However, Sparky paid $10,000 more for the new office building than the amount of the insurance proceeds.  Hence, he gets a carryover basis plus $10,000.