Publication 225
taxmap/pubs/p225-046.htm#en_us_publink1000218664Do not report a gain if you receive reimbursement in the form
of property similar or related in service or use to the destroyed, stolen, or
other involuntarily converted 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, destroyed,
or other involuntarily converted property if you receive money or unlike
property as reimbursement. However, you can choose to postpone reporting the
gain if you purchase replacement property similar or related in service or use
to your destroyed, stolen, or other involuntarily converted property within a
specific replacement period.
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/p225-046.htm#en_us_publink1000218665In 1985, you constructed a barn to store farm equipment at a
cost of $20,000. In 1987, you added a silo to the barn at a cost of $15,000 to
store grain. In May of this year, the property was worth $100,000. In June the
barn and silo were destroyed by a tornado. At the time of the tornado, you had
an adjusted basis of $0 in the property. You received $85,000 from the insurance
company. You had a gain of $85,000 ($85,000 – $0).
You spent $80,000 to rebuild the barn and silo. Since this is
less than the insurance proceeds received, you must include $5,000 ($85,000
– $80,000) in your income.
taxmap/pubs/p225-046.htm#en_us_publink1000218666In 1970, you bought a cabin in the mountains for your personal
use at a cost of $18,000. You made no further improvements or additions to it.
When a storm destroyed the cabin this January, the cabin 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 cabin. Since this is less than
the insurance proceeds received, you must include $2,000 ($146,000 −
$144,000) in your income.
taxmap/pubs/p225-046.htm#en_us_publink1000218667You cannot postpone reporting a gain from a casualty, theft,
or other involuntary conversion if you buy the replacement property from a
related person (discussed later). This rule applies to the following taxpayers.
- C corporations.
- Partnerships in which more than 50% of the capital or profits
interest is owned by C corporations.
- Individuals, partnerships (other than those in (2) above),
and S corporations if the total realized gain for the tax year on all
involuntarily converted properties on which there are realized gains is more
than $100,000.
For involuntary conversions 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.
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
involuntarily converted property.
taxmap/pubs/p225-046.htm#en_us_publink1000218669Under 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/p225-046.htm#en_us_publink1000218670If 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 involuntary conversion cannot postpone reporting the gain by buying
replacement property.
taxmap/pubs/p225-046.htm#en_us_publink1000218671You must buy replacement property for the specific purpose of
replacing your property. Your replacement property must be similar or related in
service or use to the property it replaces. 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 for other purposes, and
borrow money to buy replacement property, you can still choose to postpone
reporting the gain if you meet the other requirements. Property you acquire by
gift or inheritance does not qualify as replacement property.
taxmap/pubs/p225-046.htm#en_us_publink1000218672If 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. Examples of property that functions in the same way as the property it
replaces are a home that replaces another home, a dairy cow that replaces
another dairy cow, and farm land that replaces other farm land. A passenger
automobile that replaces a tractor does not qualify. Neither does a breeding or
draft animal that replaces a dairy cow.
taxmap/pubs/p225-046.htm#en_us_publink1000218673If, because of soil or other environmental contamination, it
is not practical for you to reinvest your insurance money from destroyed
livestock in property similar or related in service or use to the livestock, you
can treat other property (including real property) used for farming purposes, as
property similar or related in service or use to the destroyed livestock.
taxmap/pubs/p225-046.htm#en_us_publink1000218674If you sell or exchange livestock because of weather-related
conditions (discussed earlier under
Livestock Losses) and it is not practical for you to reinvest the sales proceeds
in property similar or related in service or use to the livestock, you can treat
other property (excluding real property) used for farming purposes, as property
similar or related in service or use to the livestock you sold.
If a storm or other casualty destroyed your standing crop and
you use the insurance money to acquire either another standing crop or a
harvested crop, this purchase qualifies as replacement property. The costs of
planting and raising a new crop qualify as replacement costs for the destroyed
crop only if you use the crop method of accounting (discussed in
chapter 2). In that case, the costs of bringing the new crop to the same
level of maturity as the destroyed crop qualify as replacement costs to the
extent they are incurred during the replacement period.
Standing timber you bought with the proceeds from the sale of
timber downed as a result of a casualty, such as high winds, earthquakes, or
volcanic eruptions, qualifies as replacement property. If you bought the
standing timber within the replacement period, you can postpone reporting the
gain.
taxmap/pubs/p225-046.htm#en_us_publink1000218677If 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 in Publication 547.
taxmap/pubs/p225-046.htm#en_us_publink1000218678Once you have acquired qualified replacement property that you
designate as replacement property in a statement attached to your tax return,
you cannot 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/p225-046.htm#en_us_publink1000218679You 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/p225-046.htm#en_us_publink1000218680To 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, stolen, sold, or exchanged. The replacement period generally ends 2
years after the close of the first tax year in which you realize any part of
your gain from the involuntary conversion.
taxmap/pubs/p225-046.htm#en_us_publink1000218681You are a calendar year taxpayer. While you were on vacation,
farm equipment that cost $2,200 was stolen from your farm. You discovered the
theft when you returned to your farm on November 11, 2009. Your insurance
company investigated the theft and did not settle your claim until January 5,
2010, when they paid you $3,000. You first realized a gain from the
reimbursement for the theft during 2010, so you have until December 31, 2012, to
replace the property.
taxmap/pubs/p225-046.htm#en_us_publink1000218682For your main home (or its contents) located in a federally declared
disaster area, the replacement period ends 4 years after the close of the first
tax year in which you realize any part of your gain from the involuntary
conversion. See
Disaster Area Losses, later.
For property located in the Midwestern disaster areas (defined
in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or
condemned, 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 Midwestern disaster areas.
taxmap/pubs/p225-046.htm#en_us_publink1000218684For property located in the Kansas disaster area that was destroyed,
damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas
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.
taxmap/pubs/p225-046.htm#en_us_publink1000218685For property located in the Hurricane Katrina disaster area that
was destroyed, damaged, stolen, or condemned 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/p225-046.htm#en_us_publink1000218686For the sale or exchange of livestock due to drought, flood,
or other weather-related conditions in an area eligible for federal assistance,
the replacement period ends 4 years after the close of the first tax year in
which you realize any part of your gain from the sale or exchange. The IRS may
extend the replacement period on a regional basis if the weather-related
conditions continue for longer than 3 years.
For information on extensions of the replacement period because
of persistent drought, see Notice 2006-82, 2006-39 I.R.B. 529, available at
www.irs.gov/irb/2006-39_IRB/ar11.html. For a list of counties for which exceptional, extreme, or
severe drought was reported during the 12 months ending August 31, 2010, see
Notice 2010-64, 2010-41 I.R.B. 421, available at
www.irs.gov/irb/2010-41_IRB/ar08.html.
If real property held for use in a trade or business or for investment
(not including property held primarily for sale) is condemned, the replacement
period ends 3 years after the close of the first tax year in which any part of
the gain on the condemnation is realized.
taxmap/pubs/p225-046.htm#en_us_publink1000218689You 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. Include all
the details about your need for an extension. Make your 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 can show a good reason
for the delay. You will get an extension of the replacement period if you can
show reasonable cause for not making the replacement within the regular period.
taxmap/pubs/p225-046.htm#en_us_publink1000218690You postpone reporting your gain 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.
taxmap/pubs/p225-046.htm#en_us_publink1000218691You should attach a statement to your return for the year you
have the gain. This statement should include all the following information.
- The date and details of the casualty, theft, or other involuntary
conversion.
- The insurance or other reimbursement you received.
- How you figured the gain.
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 the following items.
- The replacement property.
- The postponed gain.
- The basis adjustment that reflects the postponed gain.
- Any gain you are reporting as income.
If you intend to buy replacement property after you file your
return for the year you realize gain, your statement should also say 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 buy 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 attach a
statement to each year's return. Include in the statement detailed information
on the replacement property bought in that year.
taxmap/pubs/p225-046.htm#en_us_publink1000218694If you choose to postpone reporting the gain on weather-related
sales or exchanges of livestock, show all the following information on a
statement attached to your return for the tax year in which you first realize
any of the gain.
- Evidence of the weather-related conditions that forced the
sale or exchange of the livestock.
- The gain realized on the sale or exchange.
- The number and kind of livestock sold or exchanged.
- The number of livestock of each kind you would have sold or
exchanged under your usual business practice.
Show all the following information and the preceding information
on the return for the year in which you replace the livestock.
- The dates you bought the replacement property.
- The cost of the replacement property.
- Description of the replacement property (for example, the
number and kind of the replacement livestock).
You must file an amended return (Form 1040X) for the tax year
of the gain in either of the following situations.
- You do not acquire replacement property within the replacement
period, plus extensions. On this amended return, you must report the gain and
pay any additional tax due.
- You acquire replacement property within the required replacement
period, plus extensions, but at a cost less than the amount you receive from the
casualty, theft, or other involuntary conversion. On this amended return, you
must report the part of the gain that cannot be postponed and pay any additional
tax due.
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