RP owned residential real estate with a $680,000 adjusted basis that was condemned by City Q because it needed the land for a new convention center. RP received $975,000 condemnation proceeds for the real estate. Assume that RP would elect to defer gain recognition when possible.
a. What are the tax consequences if RP spent $200,000 of the proceeds to expand its inventory and the remaining $775,000 to purchase new residential real estate? What is RP’s basis in the inventory and the new real estate?
b. How would your answer change if RP’s basis in the condemned real estate was $850,000 rather than $680,000?
c. How would your answer change if RP invested the entire condemnation proceeds plus an additional $100,000 cash in new residential real estate?