Publication 225 |
2000 Tax Year |
Postponing Gain
Do 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 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. But 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.
To postpone 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.
Buying replacement property from a related person.
You 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 involuntary
conversions occurring after the following dates.
- February 5, 1995, for C corporations and partnerships in
which more than 50% of the capital or profits interest is owned by C
corporations.
- June 8, 1997, for individuals, partnerships (other than
those in (1) 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 (2) 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.
Exception.
This rule does not apply if the related persons acquired the
property from an unrelated person within the period of time allowed
for replacing the involuntarily converted property.
Related persons.
Under this rule, related persons include, for example, 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.
Taxpayer's death.
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 the gain by buying replacement property.
Replacement Property
You 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 the gain if you meet the
other requirements. Property you acquire by gift or inheritance does
not qualify as replacement property.
Owner-user.
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. 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 cow that replaces a
dairy cow.
Soil or other environmental contamination.
If, 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.
Standing crop destroyed by casualty.
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 do not qualify as replacement
costs for the destroyed crop, unless you use the crop method of
accounting (discussed in chapter 3).
In this 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.
Timber loss.
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.
Business or income-producing property located in a federal
disaster area.
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 a 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.
Substituting replacement property.
Once you have acquired qualified replacement property that you
designate as replacement property, you cannot substitute other
qualified replacement property. The designation is made by the
statement with your return reporting that you have acquired
replacement property. 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.
Replacement Period
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, stolen, sold, or exchanged. The replacement period
ends 2 years after the close of the first tax year in which you
realize any part of your gain from the involuntary conversion.
Condemnation.
The replacement period for a condemnation begins on the earlier of
the following dates.
- The date on which you disposed of the condemned
property.
- The date on which the threat of condemnation began.
The replacement period ends 2 years after the close of the
first tax year in which any part of the gain on the condemnation is
realized.
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.
Extension.
You may get an extension of the replacement period if you apply to
the IRS director for your area. You can call
1-800-829-1040 to get 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.
How To Postpone Gain
You postpone 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.
Required statement.
You 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.
Replacement property acquired before return filed.
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.
(Reduce the basis of the replacement property by the postponed
gain.)
- Any gain you are reporting as income.
Replacement property acquired after return filed.
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 then attach another statement to your return for the year in
which you buy the replacement property. Show in this statement
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.
Amended return.
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.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|