Casualty with Replacement Property

[equinecpa]

I'm having trouble with wrapping my head around a situation:

Tornado wiped out client building in 2016:
Cost:200,000
Depn: 75,000
ACB: 125,000

Insurance proceeds 200,000

Replacement cost 250,000

Is the additional $50,000 cost of the building now capitalized and depreciated like a building improvement as it is an involuntary converision. Does one set it up with new basis or does old basis/depn carryforward, with a new $50000 asset added with new depreciable life?

[DaveinTexas]

Involuntary Conversion

Your client's situation can be summed up this way:
1. Deferred Gain of $75,000; (Insurance proceeds of 200,000 minus ACB of $125,000) = $75,000, this is the deferred gain.
2. The new depreciable basis in the property is as follows:
a. New Cost Basis is figured this way; Carryover or AC basis ($125,000) plus the amount spent over the insurance proceeds $50,000 ($250,000 - $200,000) = $175,000
b. Stated another way, the new cost basis is the cost of the new property ($250,000) minus the gain deferred of $75,000 = $175,000

If your client files the election (Section 1033) to defer the gain, he/she will defer the gain until the building is disposed. Another way of saying this is the client now has a built in gain of $75,000 in the new building because, if sold, he would realize a $75,000 gain ($250,000 - $175,000).

The new basis in the replacement property is $175,000. I would take as a deduction the depreciation of old property prior to loss date and use the "placed into service" date on the new property to establish the depreciation deduction for the new property.

I hope that helps.

[Happy Camper]

Casualty book entries

With all the hurricanes/fires/flooding throughout the US this year, I am sure many of us are running into casualty losses. I like Dave's summary of the overview of this issue, but I am hoping someone can chime in with some details of the mechanics.

Scenario:
TP leased building and equipment damaged in hurricane - received an insurance payment for $60,000,
TP spent $20,000 for general clean-up and repairs,
$10,000 to replace roof of leased building,
$15,000 to replace fully depreciated equipment
$ 5,000 will be used in subsequent year to replace additional equipment

For book purposes, I expect that $20,000 for general clean-up would be expensed but I am not sure about the other items.

Does the $10,000 get added to fixed assets and depreciated (Sec 179) and the $10,000 of the insurance proceeds stays on the income statement & flows through net income?

Does the $15,000 of replaced equipment get added to assets like the roof above & remove fully depreciated asset?

I know that replacement property must generally be purchased within a two year period beginning at the end of the year of the insurance recovery-therefore I assume it is OK to book the $5,000 as a liability on the balance sheet?

Would any or all these items be reported on the company tax return (1120S or 1065) with a 4584?

And finally, the $10,000 of proceeds received by insurance that has not or will not be used for repairs/replacement is Other income and subject to tax.

Thanks for any input!