Mavis is a schoolteacher with an annual salary of $28,000 . Last year she sold a substantial block of securities that she had inherited from her grandmother several years before. She used the proceeds to buy an apartment building in a neighboring

community. She realized a $15,000 capital loss on the sale. She carries over $12,000 of the capital loss to the current year. During the current year, a fire destroys the apartment building when its adjusted basis is $100,000 . Mavis receives an insurance check for $110,000 and immediately invests it in another apartment building. Advise Mavis how she should deal with these situations for the current tax year.

Deferral of realized gains through involuntary conversions is not mandatory. Mavis can choose to recognize the gain of $10,000 ($110,000 - $100,000). This gain is a capital gain and can be used to offset the capital loss carryover from the previous year. A $2,000 ($12,000 - $10,000) capital loss would remain and can be deducted against other income in the current year. The replacement property will have a cost basis of $110,000 . No deferral occurred to cause a basis adjustment. Alternatively, Mavis may elect to defer the realized gain of $10,000 . The replacement property will have a basis of $100,000 ($110,000 - $10,000). Mavis will be allowed to deduct $3,000 of the capital loss carryover for the current year. That will give her a balance of $9,000 to carry forward to the next tax year. Time value of money concepts would dictate that Mavis choose the first alternative unless Mavis's marginal tax rate is expected to be significantly higher in the future.