Question

On October 23, 2019 Bill’s warehouse, located along the Dallas North Tollway, was damaged by a tornado. Bill’s tax basis in this warehouse at the time of the tornado was $800,000. Bill received insurance proceeds of $1,700,000. Complete the following:

If Bill wants to just keep the money, what will he report in 2019?

If Bill wants to replace the warehouse, and he expects that it will cost $1,900,000 to do so:

Does Bill need to report any gain in 2019? If not, why not?

By when does Bill need to replace the warehouse by if he does not want to report gain?

Answer 1

Involuntary conversion occurs when property is destroyed/stolen/condemned and the taxpayer receives insurance/condemnation award (which is also referred to as forced payment generally). Such involuntary conversions must be recognized by the taxpayer under taxable income unless the taxpayer elects to invest whole or part of the involuntary conversion proceeds in similar property of greater or equal value within certain time.

The proceeds received must be invested within 2 years from the end of the year in which taxpayer receives insurance proceeds in case of Destruction/theft of property wherein.

Realised gain of Bill = Insurance proceeds - Tax basis

= $1,700,000 - $800,000

= $900,000

1. If B just wants to keep the money he will have to report complete realised gain of $900,000.

2.If B replaces the warehouse costing $1,900,000 that means B is investing complete proceeds received from insurance company henec no gain should be recognised in 2019 i.e. B's recognised gain for 2019 is $0.

3. The proceeds received must be invested within 2 years from the end of the year in which taxpayer receives insurance proceeds in case of Destruction/theft of property wherein.

Assuming, B received insurance proceeds on the date of destruction of warehouse i.e. on Oct 23rd 2019 needs to reinvest whole of the proceeds by Dec 31st, 2021 to report no gain.