DEFINITION of 'Replacement Property'
Any property that is received as a replacement for property that was lost as a result of an involuntary conversion, such as theft. Replacement property can be either personal or business property and can include real estate, machinery and equipment, vehicles or personal equipment. Replacement property is often provided for by casualty-insurance carriers.
BREAKING DOWN 'Replacement Property'
The value of replacement property can sometimes exceed the value of the property that was lost. In this case, the taxpayer will realize a taxable gain on the difference between the excess value of the replacement property and the adjusted basis of the property that was lost. However, there are rules that allow for deferral of this gain provided certain conditions are met, and the gain can also be excluded if the property is the taxpayer's personal residence.