Question

What are the major tax differences between a casualty involuntary conversion and a condemnation conversion?

Answer 1

An casualty involuntary conversion is the taking or destruction of property without the consent of the property owner,such as partial or complete destruction.

Involuntary conversion is a taxpayer can postpone any realised gain to the extent that the taxpayer reinvest the compensation for conversion into replacement property.

Realized gain is not recognised if the total amount reinvested exceeds the amount realized.

If the reinvestment amount js less,then the difference is recognised as gain.

If the taxpayer suffers a loss on the involuntary conversion ,then $1033 does not modify any rules for loss recognition.

Condemnation conversion is the taking of private property for public use.

A condemnation conversion does not qualify under $1033 if the property was condemned because it was unfit for habitation.

If the property owner was forced to sell to pay for delinquent taxes.

An involuntary conversion does not include any voluntary acts,such as when the taxpayer destroys his own property.

If the taxpayer disposes of the property beacause of an imminent condemnation of the property, then the taxpayer must provide evidence that the condemnation was decided by the authorities,and the taxpayer reasonably believed that the property would be taken.

If the condemnation was learned from the news media,then the IRS requires the taxpayer to verify that with a public official from the condemning authority.

If the involuntary conversion involves a principal residence,then the gain may be excluded under the principal residence exclusion rules.

Any gain realised on a principal residence that exceeds the exclusion amount can be postponed by reinvesting that amount by replacement property.

For example-

Under the power of eminent domain ,a city might take a building owener's parking lot,but not the building.If the taking of the parking lot renders the operation of the building economically impractical ,then the property owner could sell the building as part of the original conversion.