Tax 4-9 Identify rules relating to an involuntary conversion. Flashcards
Involuntary Conversions
Taxpayers who no longer have the use of their property due to casualties, thefts, or condemnations may be eligible to use the involuntary conversion rules to determine the gain or loss recognized in such situations. Under the involuntary conversion rules, the recognition of the gain realized and the resulting tax may be postponed if taxpayers purchase qualified replacement property within the specified replacement period; losses resulting from condemnations are deductible only if the property was…
(4-9, 50)
business or investment property.
Involuntary Conversions
A condemnation is the lawful taking of taxpayers’ property, without their consent, for public use by the federal government, a state government, or a political subdivision in exchange for a reasonable amount of money or property—a right of government sometimes referred to as _____ domain.
(4-9, 50)
eminent
The condemnation may be actual or threatened.
Involuntary Conversions
For tax purposes, condemnations [do / do not] include condemnations of property due to the condition of the property.
(4-9, 51)
do not
For example, a deteriorating building may be
condemned if necessary repairs are not made by a specified time. This is not a condemnation or threat of condemnation for tax purposes because it does not
relate to a condemnation of private property for public use.
Involuntary Conversions
Taxpayers may postpone gains realized due to involuntary conversions only if the replacement property purchased has a cost equal to or greater than the amount of reimbursement received for the damaged, destroyed, stolen, or condemned property. For example, if a taxpayer received a $45,000 payment for condemned land, the replacement property would have to cost at least $45,000 in order to defer the recognition of the gain. If the replacement property costs less than the reimbursement received, gain [must or must not] be included in income to the extent the reimbursement exceeds the cost.
(4-9, 52)
must
Involuntary Conversions
To postpone the recognition of gain from a casualty, theft, or condemnation, the replacement property must be purchased within a specified replacement period.
The replacement period for a casualty or theft begins on the date the property was damaged, destroyed, or stolen and ends on the _____ day of the second taxable year after the year in which the taxpayer realizes a gain with respect to the property.
(4-9, 52)
last
Involuntary Conversions
To postpone the recognition of gain from a casualty, theft, or condemnation, the replacement property must be purchased within a specified replacement period.
The replacement period for a condemnation begins on the earlier of the following dates:
- the date on which the condemned property was disposed of, or
- the date on which the threat of condemnation first occurred.
(4-9, 53)
The replacement period ends on the last day of the second taxable year following the year in which any part of the gain on the condemnation is realized. If the
condemned property is real property held for use in a trade or business or for investment (not including property held primarily for sale), the replacement period ends on the last day of the third taxable year following the year in which any part of the gain on the condemnation is realized.
Involuntary Conversions
In June 2015, Kathleen Howser discovered that her safe had been stolen. In September of the same year, she received a reimbursement check from her insurance company. Kathleen would have until when to purchase replacement property?
(4-9, 53)
She would have until December 31, 2017, to purchase replacement property (the last day of the second taxable year following the year in which the gain was first realized).
Involuntary Conversions
Ken Devereaux was notified by the city council on December 2, 2012, of its intention to acquire by condemnation his real property used in his business. On June 5, 2013, the city paid Ken for his property. The replacement period began on December 2, 2012, the date Ken was notified of the intention to condemn his property. Because Ken did not realize a gain on the disposition of the property until 2013, the replacement period ends on December 31, 2016, the last day of the third taxable year following the year in which the gain was first realized.
(4-9, 53)
The replacement period for a condemnation begins on the earlier of the following
dates:
- the date on which the condemned property was disposed of
or - the date on which the threat of condemnation first occurred.
The replacement period ends on the last day of the second taxable year following the year in which any part of the gain on the condemnation is realized.
Involuntary Conversions
Module Check
- In May of 2015, Jeff King’s office was burglarized. Jeff determined that approximately $21,000 of equipment was missing. In September of 2015, he received a reimbursement check from the insurance company. If there were a realized gain in this situation, when would the replacement period end?
a. December 31, 2015
b. December 31, 2016
c. September 30, 2016
d. December 31, 2017
(LO 4-9)
d. December 31, 2017
Jeff would have until December 31, 2017, to purchase the replacement property because the replacement period for a casualty or theft ends on the last day of the second taxable year following the year in which the gain was realized.
Involuntary Conversions
Module Check
- Judy Langer’s rental real estate was completely destroyed by a fire in June of 2014, and she received the reimbursement check from the insurance company later that month. If there were a gain on the conversion, when would the replacement period end?
a. June 30, 2016
b. December 31, 2016
c. June 30, 2017
d. December 31, 2017
(LO 4-9)
b. December 31, 2016
The replacement period for a casualty or theft begins on the date the property was damaged, destroyed, or stolen and ends on the last day of the second taxable year following the year in which the taxpayer realizes a gain with respect to the property.
Involuntary Conversions
Module Check
- In November 2015, George McGraw’s rental real estate was condemned by the city under the eminent domain statute to allow for a new overpass to be built. He received the condemnation payment from the city later that month.
If there were a gain on the conversion, when would the replacement period end?
a. November 30, 2017
b. December 31, 2017
c. November 30, 2018
d. December 31, 2018
(LO 4-9)
d. December 31, 2018
The replacement period for condemned real estate used in a trade or business or held for investment purposes ends on the last day of the third taxable year following the year in which any part of the gain on the condemnation is realized.
Involuntary Conversions
In November of 2014, Ross Pullen’s office was burglarized. Ross figures that approximately $30,000 of equipment is missing. His adjusted basis in the equipment is $6,000. In January of 2015, he received a reimbursement check of $30,000 from the insurance company.
When would the replacement period end?
(LO 4-9, pg 77 of text)
Ross would have until December 31, 2017, to purchase the replacement property. The replacement period ends on the last day of the second taxable year following the year in which the gain was realized. The gain of $24,000 is realized when Ross receives the insurance check.
Involuntary Conversions
Marsha Dell owns an office building that she uses as a rental property. The building has a fair market value of $275,000 and an adjusted basis of $150,400. On March 1, 2014, a flood completely destroys the building. Marsha’s insurance company finally issues her a check for $275,000 on July 15, 2015.
When would the replacement period end?
(LO 4-9, pg 77 of text)
Marsha would have until December 31, 2017, to purchase the replacement property. The replacement period ends on the last day of the second taxable year following the year in which the gain was realized. The gain of $124,600 is realized when Marsha receives the insurance check.
- Judy Langer’s rental real estate was completely destroyed by a fire in June of 2014, and she received the reimbursement check from the insurance company later that month.
If there were a gain on the conversion, when would the replacement period end?
June 30, 2016
December 31, 2016
June 30, 2017
December 31, 2017
(LO 4-9)
December 31, 2016
The replacement period for a casualty or theft begins on the date the property was damaged, destroyed, or stolen and ends on the last day of the second taxable year following the year in which the taxpayer realizes a gain with respect to the property. If this were an involuntary conversion of business or rental real estate, the replacement period would end on the last day of the third taxable year following the year in which the taxpayer realizes a gain from the property.