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Peter Paulson purchased a residence on February 19, 2018 for $180,000. On September 7, 2020, a tornado completely destroyed their home, which was in a federally declared disaster area. The home was insured for its replacement value and homes in Peter's area had appreciated greatly. He received proceeds of $550,000. How much of a replacement residence would Peter have to purchase in order to exclude or defer all gain realized

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Answer:

Peter Paulson has to make a purchase of $300,000 in order to exclude or defer all gain realized.

Explanation:

The gains received by Peter if he received the proceed of $550,000 is given as

[tex]\dfrac{550,000}{180,000}=3.05556[/tex]

This ratio is greater than 3. Thus the value of gain is positive. Now in order to find the gains, calculate the value of amount received so that no gains are calculated. It is 2.38889 times of the original value, this comes out to be $430,000.

Now the gains are

Gain=$550,000-430,000=$120,000

In order to find the minimum purchase price, it is equal to gains plus the original value of the house which is

Min Purchase=Gain+180,000

Min Purchase=120,000+180,000

Min Purchase=$300,000

So Peter Paulson has to make a purchase of $300,000 in order to exclude or defer all gain realized.

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