In addition to casualties and thefts, other events cause involuntary conversions of property. Some of these are discussed in the following paragraphs.
Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. You report the gain or deduct the loss on your tax return for the year you realize it. However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. See Postponing Gain, later. taxmap/pubs/p225-045.htm#en_us_publink100080991
Condemnation is the process by which private property is legally taken for public use without the owner's consent. The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. The owner receives a condemnation award (money or property) in exchange for the property taken. A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. taxmap/pubs/p225-045.htm#en_us_publink100080992
Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. taxmap/pubs/p225-045.htm#en_us_publink100080993
If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. For information on this exclusion, see Publication 523. If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. See Postponing Gain, later. (You cannot deduct a loss from the condemnation of your main home.) taxmap/pubs/p225-045.htm#en_us_publink100080994
For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. Also see Postponing Gain, later, to find out if you can postpone reporting the gain.taxmap/pubs/p225-045.htm#en_us_publink100080995
The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. taxmap/pubs/p225-045.htm#en_us_publink100080996taxmap/pubs/p225-045.htm#en_us_publink100080997
If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. If the livestock was raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses. Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. If you replace the livestock, you may be able to postpone reporting the gain. See Postponing Gain, below. taxmap/pubs/p225-045.htm#en_us_publink100080998
If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock was disposed of because of disease. You must also include other information on this statement. See How To Postpone Gain, later, under Postponing Gain.taxmap/pubs/p225-045.htm#en_us_publink100080999
If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. If you replace the livestock, you may be able to postpone reporting the gain. See Postponing Gain, below. taxmap/pubs/p225-045.htm#en_us_publink100081000
It is your usual business practice to sell five of your dairy animals during the year. This year you sold 20 dairy animals because of drought. The sale of 15 animals is treated as an involuntary conversion.
If you do not replace the livestock, you may be able to report the gain in the following year's income. This rule also applies to other livestock (including poultry). See Sales Caused by Weather-Related Conditions in chapter 3.
If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. Treat the loss as a loss from an involuntary conversion. The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. You deduct the loss on the return for the year the seedlings died. If you took the investment credit for any of these costs, you may have to recapture all or part of the credit. See Form 4255, Recapture of Investment Credit.