Involuntary conversions can result from damage from an outside source, theft, condemnation, seizure, destruction, requisition or sale/exchange due to threat or condemnation of the property.
Under Section 1033 of the Internal Revenue Code (IRC), a taxpayer who incurs an involuntary conversion can postpone recognition of the gain realized from the conversion (an exception to the two-year holding period).
Why is it beneficial to postpone gain?
- No tax liability in the year of the conversion.
- Funds may be used for other investments.
In exchange for tax deferment, the basis of the replacement property is generally fixed at the same adjusted basis as the converted property. Replacement must typically be made within two years (some exceptions apply).
If insurance proceeds are less than the replacement value, then the excess invested increases the basis of the replacement property. Tax on the original gain is realized or incurred when the replacement property is actually sold.
Sample Questions 1 - 10
InvestingFind out how you can build wealth and reduce your taxes.
Financial AdvisorThe IRS allows taxpayers whose conversions turn out to be badly timed to reverse this transaction. Here's when it makes sense to do so.
RetirementWill your tax rate be lower in retirement? Do you plan to spend all your savings? Think twice about a conversion.
Financial AdvisorSo far 2016 has been off to a shaky start. Here are some tax strategies to help offset the pain.
RetirementIf you are moving assets from a Traditional IRA to a Roth IRA, you need to know the associated tax rules.
TaxesLike-kind exchanges can mean a much lower tax bill on real estate for savvy investors.
TaxesRoth conversions will be available to affluent taxpayers in 2010. Will you benefit?
TaxesUnderstanding your property taxes can protect you from financial shocks.