Federal Tax

Involuntary Conversions (Portfolio 568)

  • This Portfolio analyzes the tax problems that arise in connection with involuntary conversions resulting from the theft, destruction, seizure, requisition, or condemnation of property.

Description

Bloomberg Tax Portfolio, Involuntary Conversions, No. 568, analyzes the tax problems that arise in connection with involuntary conversions resulting from the theft, destruction, seizure, requisition, or condemnation of property. Where property is condemned or is lost through theft, fire, or a similar event and the owner receives compensation for such “involuntarily converted” property, taxable gain normally results to the extent the value of the compensation exceeds the basis of the converted property. Section 1033 is a relief provision that allows the taxpayer to defer the recognition of gain.

The basic rules are as follows:
1. Where the taxpayer receives property similar or related in service or use to the involuntarily converted property, no gain is recognized on the involuntary conversion, and the new property takes the same basis as the old property.
2. Where the taxpayer receives cash or other proceeds to compensate him for the involuntary conversion of the property, he may elect not to recognize the gain if he reinvests the proceeds in property that is similar or related in service or use to the converted property. The basis of the new property normally will be the same as the basis of the old property if all the proceeds are reinvested in the new property.

The Portfolio also discusses business interruption insurance and disaster relief payments, gives examples of involuntary conversions, explains the threat or imminence of condemnation, describes similar property, and reviews severance damages, separate awards, and replacement periods. The relationship between the investment credit, accelerated depreciation and recaptures is also discussed.

Table of Contents

I. Introduction
II. What Constitutes an Involuntary Conversion
III. Tax Consequences of Conversions into Similar Property Only: § 1033(a)(1)
IV. Tax Consequences of Conversion into Dissimilar Property Only: § 1033(a)(2)
V. Tax Consequences of Conversion into Both Dissimilar and Similar Property
VI. Making the Various Section 1033 Elections
VII. Making the Section 1033(a)(2) Replacement
VIII. Special Problems and Planning Opportunities
IX. Mortgages and Liens
X. Miscellaneous Expenses and Payments
XI. Conversions of Section 1245 and Section 1245 Recovery Property
XII. Conversions of Section 1250 Property
XIII. Section 1033 and the Rehabilitation Credit

edwards-bruce-2015
Bruce Edwards
Sorensen & Edwards, P.S.