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previous page Previous Page: Publication 547 - Casualties, Disasters, and Thefts (Business and Nonbusiness) - Deduction Limits
next page Next Page: Publication 547 - Casualties, Disasters, and Thefts (Business and Nonbusiness) - When To Report Gains and Losses
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p547-006.htm#en_us_publink100022685

Figuring a Gain(p10)


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previous topic occurrence Gain next topic occurrence

If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Your gain is figured as follows.
Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain.
taxmap/pubs/p547-006.htm#en_us_publink100022686

Amount you receive.(p10)


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The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property.
taxmap/pubs/p547-006.htm#en_us_publink100022687

Example.(p10)

A hurricane destroyed your personal residence and the insurance company awarded you $145,000. You received $140,000 in cash. The remaining $5,000 was paid directly to the holder of a mortgage on the property. The amount you received includes the $5,000 reimbursement paid on the mortgage.
taxmap/pubs/p547-006.htm#en_us_publink100022688

Main home destroyed.(p10)


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If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. 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 Postponement of Gain, later.
taxmap/pubs/p547-006.htm#en_us_publink100022689

Reporting a gain.(p10)


rule
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You generally must report your gain as income in the year you receive the reimbursement. However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next.
For information on how to report a gain, see How To Report Gains and Losses, later.
EIC
If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. See 10% Rule under Deduction Limits, earlier.
taxmap/pubs/p547-006.htm#en_us_publink100022691

Postponement of Gain(p10)


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previous topic occurrence Postponement of Gain next topic occurrence

Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Your basis in the new property is generally the same as your adjusted basis in the property it replaces.
You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. See Controlling interest in a corporation, later.
If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property.
To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement.
taxmap/pubs/p547-006.htm#en_us_publink100022692

Example.(p10)

In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. You made no further improvements or additions to it. When a storm destroyed the cottage this January, the cottage was worth $250,000. You received $146,000 from the insurance company in March. You had a gain of $128,000 ($146,000 − $18,000).
You spent $144,000 to rebuild the cottage. Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income.
taxmap/pubs/p547-006.htm#en_us_publink100022693

Buying replacement property from a related person.(p10)


rule
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You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). This rule applies to the following taxpayers.
  1. C corporations.
  2. Partnerships in which more than 50% of the capital or profits interest is owned by C corporations.
  3. All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000.
For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder.
taxmap/pubs/p547-006.htm#en_us_publink100022694

Exception.(p10)
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This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property.
taxmap/pubs/p547-006.htm#en_us_publink100022695

Related persons.(p10)
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Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544.
taxmap/pubs/p547-006.htm#en_us_publink100022696

Death of a taxpayer.(p10)


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If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property.
taxmap/pubs/p547-006.htm#en_us_publink100022697

Replacement Property(p10)


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previous topic occurrence Replacement Property next topic occurrence

You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Property you acquire as a gift or inheritance does not qualify.
You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. If you spend the money you receive from the insurance company for other purposes, and borrow money to buy replacement property, you can still postpone reporting the gain if you meet the other requirements.
taxmap/pubs/p547-006.htm#en_us_publink100022698

Advance payment.(p11)


rule
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If you pay a contractor in advance to replace your destroyed or stolen property, you are not considered to have bought replacement property unless it is finished before the end of the replacement period. See Replacement Period, later.
taxmap/pubs/p547-006.htm#en_us_publink100022699

Similar or related in service or use.(p11)


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Replacement property must be similar or related in service or use to the property it replaces.
taxmap/pubs/p547-006.htm#en_us_publink100022700

Timber loss.(p11)
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Standing timber you bought with the proceeds from the sale of timber downed by a casualty (such as high winds, earthquakes, or volcanic eruptions) qualifies as replacement property. If you bought the standing timber within the specified replacement period, you can postpone reporting the gain.
taxmap/pubs/p547-006.htm#en_us_publink100022701

Owner-user.(p11)
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If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces.
taxmap/pubs/p547-006.htm#en_us_publink100022702

Example.(p11)

Your home was destroyed by fire and you invested the insurance proceeds in a grocery store. Your replacement property is not similar or related in service or use to the destroyed property. To be similar or related in service or use, your replacement property must also be used by you as your home.
taxmap/pubs/p547-006.htm#en_us_publink100022703

Main home in disaster area.(p11)


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Special rules apply to replacement property related to the damage or destruction of your main home (or its contents) if located in a federally declared disaster area. For more information, see Gains Realized on Homes in Disaster Areas in the Instructions for Form 4684.
taxmap/pubs/p547-006.htm#en_us_publink100022704

Owner-investor.(p11)
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If you are an owner-investor, similar or related in service or use means that any replacement property must have a similar relationship of services or uses to you as the property it replaces. You decide this by determining all the following.
taxmap/pubs/p547-006.htm#en_us_publink100022705

Example.(p11)

You owned land and a building you rented to a manufacturing company. The building was destroyed by fire. During the replacement period, you had a new building constructed. You rented out the new building for use as a wholesale grocery warehouse. Because the replacement property is also rental property, the two properties are considered similar or related in service or use if there is a similarity in all the following areas.
taxmap/pubs/p547-006.htm#en_us_publink100022706

Business or income-producing property located in a federally declared disaster area.(p11)
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If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. For more information, see Disaster Area Losses, later.
taxmap/pubs/p547-006.htm#en_us_publink100022707

Controlling interest in a corporation.(p11)


rule
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You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your damaged, destroyed, or stolen property. You can postpone reporting your entire gain if the cost of the stock that gives you a controlling interest is at least as much as the amount received (reimbursement) for your property. You have a controlling interest if you own stock having at least 80% of the combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock.
taxmap/pubs/p547-006.htm#en_us_publink100022708

Basis adjustment to corporation's property.(p11)
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The basis of property held by the corporation at the time you acquired control must be reduced by the amount of your postponed gain, if any. You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by the amount of your postponed gain).
Allocate this reduction to the following classes of property in the order shown below.
  1. Property that is similar or related in service or use to the destroyed or stolen property.
  2. Depreciable property not reduced in (1).
  3. All other property.
If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted bases of all the properties in that class. The reduced basis of any single property cannot be less than zero.
taxmap/pubs/p547-006.htm#en_us_publink100022709

Main home replaced.(p11)


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If your gain from the reimbursement you receive because of the destruction of your main home is more than the amount you can exclude from your income (see Main home destroyed under Figuring a Gain, earlier), you can postpone reporting the excess gain by buying replacement property that is similar or related in service or use. To postpone reporting all the excess gain, the replacement property must cost at least as much as the amount you received because of the destruction minus the excluded gain.
Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the destroyed property as your main home.
taxmap/pubs/p547-006.htm#en_us_publink100022710

Basis of replacement property.(p11)


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You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. In this way, tax on the gain is postponed until you dispose of the replacement property.
taxmap/pubs/p547-006.htm#en_us_publink100022711

Example.(p11)

A fire destroyed your rental home that you never lived in. The insurance company reimbursed you $67,000 for the property, which had an adjusted basis of $62,000. You had a gain of $5,000 from the casualty. If you have another rental home constructed for $110,000 within the replacement period, you can postpone reporting the gain. You will have reinvested all the reimbursement (including your entire gain) in the new rental home. Your basis for the new rental home will be $105,000 ($110,000 cost − $5,000 postponed gain).
taxmap/pubs/p547-006.htm#en_us_publink100022712

Replacement Period(p11)


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previous topic occurrence Replacement Period next topic occurrence

To postpone reporting your gain, you must buy replacement property within a specified period of time. This is the replacement period.
The replacement period begins on the date your property was damaged, destroyed, or stolen.
The replacement period ends 2 years after the close of the first tax year in which any part of your gain is realized.
taxmap/pubs/p547-006.htm#en_us_publink100022713

Example.(p11)

You are a calendar year taxpayer. While you were on vacation, a valuable piece of antique furniture that cost $2,200 was stolen from your home. You discovered the theft when you return home on August 10, 2008. Your insurance company investigated the theft and did not settle your claim until January 2, 2009, when they paid you $3,000. You first realized a gain from the reimbursement for the theft during 2009, so you have until December 31, 2011, to replace the property.
taxmap/pubs/p547-006.htm#en_us_publink100022714

Main home in disaster area.(p11)


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For your main home (or its contents) located in a federally declared disaster area, the replacement period generally ends 4 years after the close of the first tax year in which any part of your gain is realized. See Disaster Area Losses, later.
taxmap/pubs/p547-006.htm#en_us_publink100022715

Example.(p11)

You are a calendar year taxpayer. A hurricane destroyed your home in September 2008. In December 2008, the insurance company paid you $3,000 more than the adjusted basis of your home. The area in which your home is located is not a federally declared disaster area. You first realized a gain from the reimbursement for the casualty in 2008, so you have until December 31, 2010, to replace the property. If your home had been in a federally declared disaster area, you would have until December 31, 2012 to replace the property.
taxmap/pubs/p547-006.htm#en_us_publink100081795

Property in a Midwestern disaster area.(p11)


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For property located in a Midwestern disaster area that was destroyed, damaged or stolen as a result of severe storms, tornadoes, or flooding, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement period applies only if substantially all of the use of the replacement property is in a Midwestern disaster area.
Midwestern disaster areas are defined on page 1 under What's New for 2008.
taxmap/pubs/p547-006.htm#en_us_publink100022789

Property in the Kansas disaster area.(p11)


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For property located in the Kansas disaster area that was destroyed, damaged, or stolen after May 3, 2007, as a result of storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area.
The Kansas disaster area is defined on page 1 under What's New for 2008.
taxmap/pubs/p547-006.htm#en_us_publink100022716

Property in the Hurricane Katrina disaster area.(p11)


rule
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For property located in the Hurricane Katrina disaster area that was destroyed, damaged, or stolen after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area.
taxmap/pubs/p547-006.htm#en_us_publink100022717

Property in the New York Liberty Zone.(p12)


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For property located in the New York Liberty Zone that was damaged or destroyed as a result of the September 11, 2001, terrorist attacks, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement period applies only if substantially all of the use of the replacement property is in the City of New York, New York.
taxmap/pubs/p547-006.htm#en_us_publink100022718

Area defined.(p12)
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The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.
taxmap/pubs/p547-006.htm#en_us_publink100022719

Extension.(p12)


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You can apply for an extension of the replacement period. Send your written application to the Internal Revenue Service Center where you file your tax return. See your tax return instructions for the address. Your application must contain all the details about the need for the extension. You should make the application before the end of the replacement period.
However, you can file an application within a reasonable time after the replacement period ends if you have a good reason for the delay. An extension may be granted if you can show that there is reasonable cause for not making the replacement within the regular period.
Ordinarily, requests for extensions are not made or granted until near the end of the replacement period or the extended replacement period. Extensions are usually limited to a period of not more than 1 year. The high market value or scarcity of replacement property is not sufficient grounds for granting an extension. If your replacement property is being constructed and you clearly show that the construction cannot be completed within the replacement period, you may be granted an extension of the period.
taxmap/pubs/p547-006.htm#f15090k02

Table 3. When To Deduct a Casualty or Theft Loss

IF you have a loss... THEN deduct it in the year...
from a casualty the loss occurred.
in a federally declared disaster area the disaster occurred or the year immediately
before the disaster.
from a theft the theft was discovered.
on a deposit treated as a casualty  a reasonable estimate can be made.
taxmap/pubs/p547-006.htm#en_us_publink100022720

How To Postpone a Gain(p12)


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previous topic occurrence Sale of Property, Gain or Loss next topic occurrence

You postpone reporting your gain from a casualty or theft by reporting your choice on your tax return for the year you have the gain. You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain.
If a partnership or a corporation owns the stolen or destroyed property, only the partnership or corporation can choose to postpone reporting the gain.
taxmap/pubs/p547-006.htm#en_us_publink100022721

Required statement.(p12)


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You should attach a statement to your return for the year you have the gain. This statement should include the following.
taxmap/pubs/p547-006.htm#en_us_publink100022722

Replacement property acquired before return filed.(p12)
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If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all of the following.
taxmap/pubs/p547-006.htm#en_us_publink100022723

Replacement property acquired after return filed.(p12)
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If you intend to acquire replacement property after you file your return for the year in which you have the gain, your statement should also state that you are choosing to replace the property within the required replacement period.
You should then attach another statement to your return for the year in which you acquire the replacement property. This statement should contain detailed information on the replacement property.
If you acquire part of your replacement property in one year and part in another year, you must make a statement for each year. The statement should contain detailed information on the replacement property bought in that year.
taxmap/pubs/p547-006.htm#en_us_publink100022724

Substituting replacement property.(p12)


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Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot later substitute other qualified replacement property. This is true even if you acquire the other property within the replacement period. However, if you discover that the original replacement property was not qualified replacement property, you can (within the replacement period) substitute the new qualified replacement property.
taxmap/pubs/p547-006.htm#en_us_publink100022725

Amended return.(p12)


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You must file an amended return (individuals use Form 1040X) for the tax year of the gain in either of the following situations.
taxmap/pubs/p547-006.htm#en_us_publink100022726

Three-year limit.(p12)


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The period for assessing tax on any gain ends 3 years after the date you notify the director of the Internal Revenue Service for your area of any of the following.
taxmap/pubs/p547-006.htm#en_us_publink100022727

Changing your mind.(p12)


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You can change your mind about whether to report or to postpone reporting your gain at any time before the end of the replacement period.
taxmap/pubs/p547-006.htm#en_us_publink100022728

Example.(p12)

Your property was stolen in 2007. Your insurance company reimbursed you $10,000, of which $5,000 was a gain. You reported the $5,000 gain on your return for 2007 (the year you realized the gain) and paid the tax due. In 2008 you bought replacement property. Your replacement property cost $9,000. Since you reinvested all but $1,000 of your reimbursement, you can now postpone reporting $4,000 ($5,000 − $1,000) of your gain.
To postpone reporting your gain, file an amended return for 2007 using Form 1040X. You should attach an explanation showing that you previously reported the entire gain from the theft but you now want to report only the part of the gain ($1,000) equal to the part of the reimbursement not spent for replacement property.
previous pagePrevious Page: Publication 547 - Casualties, Disasters, and Thefts (Business and Nonbusiness) - Deduction Limits
next pageNext Page: Publication 547 - Casualties, Disasters, and Thefts (Business and Nonbusiness) - When To Report Gains and Losses
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication