Heather owns a two-story building. The building is used 40% for business use and 60% for personal use. During 2020, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $100,000 on the business portion. At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed. If Heather’s AGI is $100,000 before considering the effects of the fire, determine her itemized deduction as a result of the fire. Also determine Heather’s AGI.

Explanation:

cost of building = $800,000

business = $800,000 x 40% = $320,000 - $100,000 (depreciation) = $220,000

personal use = $800,000 x 60% = $480,000

adjusted basis:

business = $220,000

personal use = $480,000

decline in FMV:

business = $700,000 x 40% = $280,000

personal use = $700,000 x 60% = $420,000

loss on building (lesser of basis of decline in FMV):

business = $220,000

personal use = $420,000

recovery from insurance company $600,000

business = $600,000 x 40% = $240,000

personal use = $600,000 x 60% = $360,000

gain/loss on building:

business = $175,000 - $220,000 = -$45,000 (loss)

personal use = $360,000 - $420,000 = -$60,000 (loss)

gain/loss on contents:

business = $240,000 - $220,000 = $20,000 (loss)

personal use = $65,000 - $50,000 = $15,000 (gain)

AGI before the fire = $100,000

+ business gain on building $20,000

- business loss on contents ($45,000)

- personal loss on building up to personal gain ($15,000)

+ personal gain on contents $15,000

heather's AGI after the fire = $75,000

a.   is the correct choice.

good luck. : )

answer; monopolistic competition;