Academic journal article Journal of Accountancy

Twisters, Gains and Involuntary Conversions

Academic journal article Journal of Accountancy

Twisters, Gains and Involuntary Conversions

Article excerpt

A taxpayer's principal residence was destroyed by a tornado in September 1991 in an area later declared a disaster area by the president. The taxpayer had a combined basis of $100,000 in the land and the house. Later that year, the taxpayer received a check for $120,000 from an insurance company, but the taxpayer decided not to rebuild. Instead, the land was sold in November 1993 for $10,000. In March 1995, the taxpayer purchased another principal residence for $130,000.

According to Internal Revenue Code section 1033(a)(2)(A), if property is involuntarily converted into money that is used to purchase property similar or related in service or use to the converted property, only the amount of the conversion that exceeds the cost of the replacement property is recognized as gain. Section 1033(a) (2) (]3) says that in the event of a presidentially declared disaster, replacement property must be purchased within four years after the close of the taxable year in which the gain is realized.

In revenue ruling 96-32, the Internal Revenue Service said the taxpayer in this case realized a $20,000 gain on receipt of the $120,000 of insurance proceeds in 1991. The IRS did not require the taxpayer to apportion the basis between the land and the house; instead, it said no separate basis had to be apportioned to the dwelling (Treasury regulations section 1. …

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