What is Involuntary conversion?
In short
An involuntary conversion occurs when property is destroyed, stolen or condemned and the owner receives insurance or other compensation. Gain can be deferred under Section 1033 by reinvesting in similar property within the replacement period.
Key takeaways
- Gain is recognized only to the extent the proceeds aren't reinvested.
- The replacement period is generally two years after the year the gain is realized (three years for condemned business or investment real property).
- The new property's basis is reduced by the deferred gain.
Where it's tested
REG: Property Transactions: Gains, Losses & Like-Kind Exchanges — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A business building with an adjusted basis of $120,000 is destroyed by fire. The owner receives $200,000 of insurance proceeds and, within the replacement period, spends $180,000 on a similar building. How much gain is recognized if the owner elects §1033?