Invol. Conv.

Question 1

A storm destroys Mary’s condo. The condo has an adj basis of $49000, but Mary’s insurance co gives her a $175000 insurance settlement, which was the FMV of the condo before it was destroyed. Nine month later, Mary uses all of the ins proceeds to purchase a replacement rental property for $175000 and also pays $3000 in legal fees to a R/E attorney to transfer title. How much taxable gain does Mary report and what is her basis in the new property?

Answer 1

Ins settlement $175000 minus Condo’s Basis $49000 = Realized Gain of $126000.
Replacement Property cost $175000
Recognized Gain (taxable) less ins settlement is $0 ($175000 - $175000)
Realized Gain - Recognized Gain = Deferred Gain
So $126000 - $0 = $126000 (deferred gain)
Basis new property:
new property cost minus deferred gain + other costs)
$175000 (cost of repl prop) minus $126000 (deferred gain) plus
+ $ 3000 (other costs) EQUALS
= $52000 Basis of replacement property
Remember:

Question 2

Tom owns a rental house in Iowa with a basis of $250000. He receives an insurance settlement of $400000 after the house is destoyed in a storm. Six months later, Tom purchases another house for $380000. How much taxable gain does Tom report and what is his basis in the new house?

Answer 2

Insurance settlement - House Basis = Realized Gain
$400000 - $250000 = $150000
Recognized Gain = Ins settlement - Cost of replacement house
$20000 = $400000 - $380000
Deferred Gain = Realized Gain - Recognized Gain
$130000 = $150000 - 20000
Basis new house = replacement propety - deferred gain.
$250000 = $380000 - $130000

What if he used 100% of ins proceeds to buy new house?

Question 3

A fire destroyed Jan’s rental house on 1/9/2024. It was a total loss. Before the fire, the home had an adj basis of $80000, and the insurance co paid her $130000 for the loss on 11/3/2024. Jan bought a smaller replacement rental house of $100000 on 12/28/2024. Jan used the remaining $30000 from the insurance proceeds to pay off other personal debt. How much is her taxable gain from from this casualty event and what is her basis in the new rental house?

Answer 3

Realized gain:
Insurance proceeds - basis before fire = realized gain.
$130000 - $80000 = $50000

Taxable Gain:
Insur proceeds - cost of replacement property = Taxable gain
If Cost of replacement property = $100000 then:
$130000 - $100000 = $30000 taxable gain

Realized gain - taxable gain = deferred gain
$50000 - $30000 = $20000 deferred gain

Basis of replacement property:
Cost of replacement property - deferred gain = Basis of replacement property
$100000 - $20000 = $80000 basis

Question 4

What are the replacement periods for the following kinds of property to defer gain on an involuntary conversion:
1. Personal Homes (and most other prop excluding the prop listed below)
2. Real Property held for investment or for biz
3. Livestock (due to weather conditions)
4. Main Home in a Fed. Declared Disaster Area

Answer 4

1. 2 Years
2. 3 Years
3. 4 years
4. 4-5 Years (or IRS guide)

Question 5

In an involuntary conversion, does replacing the converted property with property purchased from a related party qualify for nonrecognition treatment under Section 1033?
A. Only if the related party is an immediate family member.
B. Yes, it qualifies.
C. No, it does not qualify.
D. It qualifies only if the property is held at least two years.

Answer 5

C:
Replacement property in an involuntary conversion cannot be acquired from a related party.

Unlike a 1031 exchange, replacing the converted property with property purchased from a related party does not qualify for nonrecognition treatment.

Question 6

Ingram purchased a diamond ring at an estate sale for $1,500. Later, he had the ring appraised and discovered it was a rare antique worth $45,000. He insured the ring for $30,000. The ring was stolen a year later during a robbery. His homeowner’s insurance company reimbursed Ingram for $30,000 of his theft loss. How would Ingram report this transaction on his tax return?

A. $28,500 taxable gain.
B. $15,000 capital loss.
C. $13,500 taxable gain.
D. $1,500 capital loss.

Answer 6

A:
Ingram must report a $28,500 taxable gain, equal to the amount by which the insurance reimbursement exceeded his basis in the ring ($30,000 - $1,500 = $28,500).