Whitney owned an office building that she rented out to several companies. The building was destroyed
by a fire and Whitney received a settlement from her insurance company. She would like to reinvest in
new property and wants to make sure that she is eligible for nontaxable exchange treatment. Which of
the following is incorrect regarding the requirements for nontaxable exchange treatment on her
transaction?
a Because Whitney rented out the building instead of using the property directly, the
replacement property must meet the functional use test.
b Whitney must invest the proceeds in a replacement property that has a similar use to the
property that was destroyed in the fire.
c Whitney must reinvest the insurance proceeds within two years from the end of the year in
which she received the insurance proceeds.
d Since Whitney received cash as a result of the involuntary conversion, nonrecognition
treatment is not mandatory even if she meets all of the requirements.
